Infrastructure debt: The thesis proves itself

This interview first appeared in Infrastructure Investor’s Debt Report published on 1 March 2021.

The growing global focus on sustainability creates a unique opportunity for the asset class, says co-head of Macquarie’s infrastructure debt business Kit Hamilton and its head of risk Sophia Alison.

What has covid taught us about the resilience of infrastructure debt?

Sophia Alison: The past year has showcased the core thesis behind infrastructure debt – the stability of the asset class. If you look at Moody’s publicly rated universe, there were fewer than 10 infrastructure defaults in 2020, compared to more than 200 for non-financial corporates. That equates to a default rate of 0.8 percent compared to 3.1 percent.¹

Our own portfolio bears out that same story. That is testament not only to the resilience of the asset class but also to our strong underwriting standards. Across our portfolio of around 120² investments, we have had less than ten downgrades and no defaults or impairments. That isn’t just in 2020, but since the business began back in 2012. That is not to say we are immune to the impacts of covid. Transportation assets, and in particular airports, have clearly experienced unprecedented stress. But structural protections, combined with asset selection – backing core assets owned by high quality sponsors – have meant we are well positioned to navigate this uncertain period.

Kit Hamilton: I would agree. Even in areas where there has been a GDP or volume impact, the protections embedded in our agreements with borrowers have served us well. We are not complacent, but it appears that our structures are standing up well.

What measures did you put in place to assess that resilience when the pandemic first hit?

KH: During the first two to three months, we were almost entirely focused on portfolio management. At least 90 percent of our time was spent assessing the impact of the pandemic across the assets, and more importantly, assessing impacts for the people working at those assets. Then it really came down to engagement. We wanted to understand how each business had been affected, but also offer to support those businesses as they worked through this very challenging and uncertain environment. It was something we needed to tackle collectively, alongside the management teams and owners of the assets in which we invest. Fortunately, our portfolio was generally resilient, although we have been involved in some waiver processes. We were then able to pick up on primary issuance again in the second half of the calendar year.

How has the crisis served to highlight the importance of sustainability?

KH: The drive towards sustainability has been an important theme for us for some time. To put that in context, we have deployed more than €8 billion of assets.³ More than 30 percent of that has been invested in the green space.⁴

Meanwhile, government responses to the pandemic should create additional opportunities. In Germany, about €40 billion⁵ is being diverted to green projects. France has said €30 billion⁶ will be invested in the space. In the UK, it is in excess of €10 billion⁷. And it is perfectly possible that with the change of administration in the US, with Biden returning to the Paris Climate Accord, substantial stimulus could be unlocked for sustainable investing. This has always been an exciting space for us, but the supportive environment emerging globally, can only be good. It is great to see governments wanting to do the right thing and allocating resources to the concept of building back better.

Some of your peers are sceptical that this ambitious rhetoric will ever translate into workable deal flow. Do you disagree?

KH: I think that kind of scepticism is understandable but when you look at the sheer scale of the commitments being made – somewhere around €270bn in Europe alone – these are still very big numbers, even if only a proportion of that comes to fruition. It is important to note that governments are making these announcements because the communities they represent want them to be investing in this space. That supportive attitude can be manifested in a number of different ways. For example, investors historically have often faced obstacles around securing construction and planning permissions, which may now prove easier to overcome.

So, what kinds of sustainable investment opportunities excite you most?

KH: We have a global mandate. Over the course of the past year, we have invested in solar, wind and energy recovery. Our job is to make sure we are at the forefront of where the equity markets are going, supporting new technologies, whilst also maintaining investment momentum behind more established technologies as well.

How do you decide when an emerging opportunity has become bankable?

KH: When I look back to when we first began lending in solar, there were those that remained unconvinced. They questioned the resource risk and asked how we could be sure that the sun would shine when we wanted it to. We backed the thesis, nonetheless, and clearly that thesis has been borne out. When it comes to some of the newer trends, like energy-from-waste, for example, there is no single tipping point that tells you that now is the time to invest. What is important is to make sure you have access to all the right market sources, so that when an asset class does become bankable, you are ready to move. Hydrogen is an interesting case in point. We have a number of gas assets that are active in engaging with hydrogen conversion. We haven’t financed anything in the hydrogen-only sector so far, but we are watching closely, and when the time is right, we expect to be at the cutting edge of that as well.

Macquarie Asset Management has recently made a net zero carbon commitment. Why have you taken that step and why is it important for the business?

SA: First and foremost, it was just the right thing to do. We know from the climate science that we need to take concrete, collective action if we are to have an impact. As a leading global asset manager, we recognise that we have both a responsibility and an opportunity to be part of the solution. The other point to make is that this commitment was really led by our people. Our staff have taken this issue seriously for a number of years and we have integrated ESG across each stage of our investment approach. Ultimately, I think those factors will prove key to our ability to deliver on our ambitions.

Our net zero commitment has also taken place against a backdrop of increasing investor interest in ESG. In addition, we are seeing regulators start to grapple with the mechanisms they can employ to encourage this push towards more sustainable investing. The EU has the Sustainable Finance Disclosure Regulation, as well as the taxonomy for sustainable activities. We are starting to see these clearer frameworks emerging in other markets too. 

Covid has clearly intensified focus on environmental concerns, but it has also highlighted other sustainability issues, including the digital divide. Is that an important investment theme?

KH: Certainly, the digital space is an exciting area for us. We have been investing in the sector for some time and just recently made an investment in Europe’s largest data centre campus. It is true, however, that the pandemic has reinforced the need for digital investment and if I look at our pipeline for the next 12 to 24 months, there is a material ramp up in deal flow in the sector emerging.

SA: I think the point about digital inclusion is very important and is something that the pandemic has highlighted. I think we will see more engagement from governments around the issue of enhancing connectivity in areas that it might otherwise take infrastructure providers longer to reach. We have previously invested in the roll-out of fibre in France, which offers a great example of how focused and deliberate action by government can help tackle the digital divide. I think we will see similar examples emerge around the world as governments increasingly recognise how important equitable access to digital infrastructure really is.

What does an unprecedented global focus on sustainability mean for the future of infrastructure debt?

SA: If you think about the world that our children will live in and how to form a bridge from where we are today, to there, it is clear infrastructure investment will be absolutely key. Infrastructure debt will represent the majority of that investment, so the asset class has a huge role to play in driving not only the post-pandemic recovery but solving longer term sustainability challenges too. If we take climate change as an example, we know that taking action this decade to accelerate the energy transition is crucial. Infrastructure debt will also have a huge role to play in renewing ageing infrastructure. The need for investment in this area is considerable and vital if we are to drive positive change across a number of sustainability areas.

KH: We are not the only ones to have spotted this opportunity, but it is vast and spans a multitude of industries. We have built a team of around 40 people who are excited to work across these different sectors and geographies to make a difference, and hopefully create a legacy for the generations to come.