Even if partial, and limited to certain sectors, inflation-hedging characteristics of the infrastructure asset class were on display in this quarter, as the higher cash flow forecast somewhat offset the negative impact of higher interest rates.
The infra300® index, which tracks a representative global sample of unlisted infrastructure equity investments worth more than USD 200bn, ended the quarter lower by 1.27% (local currency returns) and is now down -5.21% YTD 2022. The 12-month return stands at 4.83% after a strong post-pandemic recovery in 2021, driven by the characteristic cash yield of this asset class. The rise in interest rates is still the most significant factor impacting the discount rates and the valuations, but the increase in expected cash flows over the last 1yr has offset more than half of this negative impact.
Companies with merchant business model (TICCS-BR-2) have been recovering well from the Covid downturns and are expected to grow their revenues at more than 10% over the next 2 years. They were the strong performers in this quarter and contributed 1.01% to the infra300 index. Looking at the corporate governance structures (TICCS – CG), the largest 100 project financed companies in EDHECinfra universe, dominated by companies with contracted business risk (TICCS – BR 1), have suffered more from rising interest rates and reported a quarterly total return of -4.59%.
At the sector level, transport (TICCS– IC60) and power generation assets (TICCS – IC10), were the only two sectors in the positive territory over this quarter. In particular, airports have seen a steady downward trend in equity risk premium, as the profitability in this sector has returned to pre-pandemic levels – the equity risk premia is down around 80bps from the highs seen in Covid-19 and currently stands at 658bps. The high-risk opportunistic companies, had a much better quarter with a 1.49% return (local currency), followed by -2.31% and -5.30% returns in the Core+ and Core segments of the market respectively.
2022 has been a turbulent year for all credit markets and infrastructure debt was no different. The yield-to-maturity for the global infrastructure debt market has risen by 2% this year (almost 1% in Q2 2022) and is now at 4.6%. While the bulk of this increase in yield is the result of higher interest rates, average credit spreads have also gone up by close to 40bps in this year. So far in 2022, project finance companies have performed better with an increase of 31bps in average credit spread.
As a result of the sharp increase in yields, EDHECinfra’s flagship debt index, the infra300® Debt index, returned -4.03% and -8.67% in Q2 and YTD 2022 respectively (local currency), which is still better than some other debt indices, such as the S&P 500 Bond index which has returned -13.01% YTD 2022. The infra300® Debt index index represents the performance of the most recent senior debt instruments issued by the constituents in the infra300® equity index. It includes more than 370 senior debt instruments with a market capitalisation of more than USD 80bn. Long term debt index was affected the worst by the rise in yields because of its longer duration and returned -7.48% in Q2 2022 (local currency).
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