The Q2 2020 release of the EDHECinfra indices marks a new quarter of negative returns for the unlisted infrastructure asset class.
The infra300 index is down -1.5% on the quarter ending 30 June 2020. This index measures the average mark-to-market performance of 300 unlisted infrastructure equity investments that make a representative sample by sector, corporate structure, and business model of the investible universe in 22 countries.
The EDHECinfra Broadmarket Unlisted Equity Index (value weighted), which tracks the performance of more than 500 investments globally and is much more exposed to large infrastructure corporates that are the most impacted by the Covid-19 crisis is down -5.19% on the quarter, or -4.35% on a 12-month basis.
This performance reflects the evolution of the valuation fundamentals that influence the market value of unlisted infrastructure companies. The average equity risk premia increased again in the second quarter of 2020 by about 20 basis points. However, that’s less than the rise seen in Q1 2020 when it jumped by 90 basis points for the infra300 and 100 basis points for the EDHECinfra broadmarket index. With interest rate curves mostly lower following the interventions of central banks, the average discount rate is in fact stable and some cases even slightly lower than in Q1 2020.
However, in aggregate, future dividends are also lower in numerous sectors. First, the sectors directly impacted by Covid-19 lock-downs have seen expected revenues and dividend payouts continue to decrease since Q1 2020. Second, a number of private infrastructure companies in transport sector have received public sector bail-out which requires dividend lock ups for several years to come. Finally, new infrastructure sectors are being affected by lower levels of economic activity that were not initially impacted by Covid-19, including network utilities and some power companies.
As a result, average valuations have decreased again in Q2 2020: for example, the infra300 price-to-sales ratio, which stood at 2.33 in Q1, is now 2.17.
However, the picture is more mixed when considering different types of infrastructure investments and business models. in Q1 2020, the increase in risk premia was high enough to make all sectors experience negative returns, albeit limited for some. In Q2 2020, the average performance of Contracted infrastructure companies (TICCS®-BR1), which make up almost half of the market by number of investments, is still in positive territory and returns 2.5% over the past 12 months, despite Covid-19.
Conversely, the Airport Company Index (TICCS-IC6010) exhibits -4.23% quarterly returns in Q2 2020, while Merchant Road Companies (TICCS-BR2/IC6050) returns -8.03% on the quarter and -12.16% on a 12-month basis. It is important to note that while negative, Q2 quarterly returns in the transport sectors are less bad than in Q1 2020, suggesting that most of the loss of future income and current value has now been priced in.
On the private infrastructure debt side, the picture is quite different. Having increased a lot in Q1 2020, infrastructure corporate debt spreads have dropped to the 150-160 basis points range and project finance senior debt spreads barely moved at 171 basis points on average vs. 165 basis points in Q1 2020. Lower rates have pushed down the yield-to-maturity of infrastructure debt very close to 2% on average (2.43% for project finance debt). While we do see an increase in the average probability of default in 2020, levels of credit risk remain low, while the one-year ahead loss-given-default remains in the 15-20% range.
As a result, private infrastructure debt is performing well with a quarterly return of 2.54% (5.32% year-on-year) for the broadmarket private infrastructure debt index and 1.61% quarterly (7.24% year-on-year) for the Global Project Finance Debt Index.