A new paper drawn from the Natixis/EDHECinfra research chair sheds new light on the drivers of returns in private infrastructure debt.
Infrastructure credit spreads remain twice as high today as in 2008, but this new research shows that only 30bps of this increase cannot be explained by changes in systematic risk factor prices.
Anne-Christine Champion, Global Head of Real Assets at Natixis said: “These results show that infrastructure debt is fairly priced today because spreads are driven by systematic effects, representing the evolution of the preferences of market participants. This is important as infrastructure debt becomes more mainstream and measuring relative performance requires estimating fair value.”
The paper also shows that infrastructure debt pricing differs from corporate debt. While infrastructure spreads can be explained by a number of risk factors found across credit instruments, these factors impact infrastructure debt spreads differently. For example, larger corporate loans with longer maturities have higher spreads but the reverse is true of larger infrastructure project loans.
EDHECinfra director Frederic Blanc-Brude said, “We find that these effects change of over time. Some are impacted by the credit cycle, others by the business cycle. Important factors like the level of interest rates and geography have lost almost all power since quantitative easing policies started, other risk factors like size and duration are more persistent even with ultra-low interest rates.”
The paper uses a unique dataset of thousands of credit spreads and a multi-factor model to extract the systematic components of market prices from new instruments as they are originated. It then applies these systematic effects to a much larger, representative set of investible infrastructure debt, allowing unique insights into the private infrastructure debt market.