The unlisted infrastructure asset class is finally showing signs of recovery from Covid-19 with a significant drop in the equity risk premium in Q2 2021, ending six consecutive quarters of losses.
Since the onset of Covid-19, this quarter marks the first in which all segments of the infrastructure market have shown a positive return, even as interest rates remain at the highest level seen in more than a year amid ongoing fears of rising inflation.
The infra300® index, which tracks a representative global sample of unlisted infrastructure equity investments worth approximately USD 250bn, rose 5.75% in Q2 (in local currency), resulting from a combination of a 40bps drop in the average equity risk premium and largely unchanged interest rates. On a year-on-year basis, the capital return of the index is close flat, with the cash yield explaining the bulk of the 7.63% total return.
At the sector level, while all segments registered positive performance in the quarter, longer duration assets such as utilities (TICCS® – IC80), which are more sensitive to changes in the equity risk premium, led the sector level returns with an average return of 7.77% (in euros). In the transport sector (TICCS® – IC60), airports and roads registered lower positive returns in Q2 of 2% and 1% (in euros) respectively, as their short-term revenue projections continued to be marred by the impacts of Covid-19.
Contracted infrastructure companies (TICCS® – BR10) have proven resilient during the past year of crisis and continue to perform well. On a five-year basis, they generated a 5.66% return (in euros) with a Sharpe ratio of 0.70, outperforming the broader unlisted infrastructure equity market. Looking at corporate governance buckets (TICCS® – CG), infrastructure corporates outperformed project-financed companies over the quarter by more than 3 percentage points (in euros); however, they are still lagging on a year-on-year basis. Corporates were severely affected by Covid-19 but now show a stronger recovery, with their average equity risk premium shrinking by 55bps compared to just 25bps for infrastructure projects.
On the private infrastructure debt side, the picture is quite different. After a sharp spike in yield in Q1, in line with the rest of the debt market, the broad-market index returned 1.25% In Q2 and a modest 1.16% on a year-on-year basis (in euros). This index includes more than 1,000 senior debt instruments across infrastructure corporates and projects and has an average modified duration of 5.5 years.
Average credit spreads for all private infra debt now stand at more than 150bps, closer to the pre-pandemic level, resulting in average yields dropping by around 10bps on the quarter to 2.37%. Spreads are now 16% tighter than the widest level seen last year in the early phase of the pandemic.
However, there continue to be stark differences between Global Project Finance Debt and Global Corporate debt indices. The credit spreads for the project financed debt stand at 188bps after barely moving during Q2, resulting in a muted quarterly return of 0.36% (in euros). By comparison, corporate debt spreads are back at their pre-pandemic level (123bps) with a reduction of more than 20bps on the quarter. This translates into a quarterly return of 1.96% (in euros) for the Global Corporate debt index.
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