Traditional lending for infrastructure has been getting tougher for banks; therein lies the opportunity of junior infrastructure debt – ‘sensible’ leverage, less competition.
Nobody expects central banks’ New Year’s resolutions list to include lowering interest rates. Perhaps more debatable is whether the cost of borrowing further rises at the pace it has over the last few quarters.Given the stable cashflows associated with infrastructure assets, there is an attractive opportunity to take more leverage to increase returns.I always subscribed to Oscar Wilde’s view that resolutions are simply cheques one draws on a bank where they have no account.
Here’s where things get interesting. Given the stable cashflows associated with infrastructure assets, there is an attractive opportunity to take more leverage to increase returns but still benefit from solid asset backing. Therein lies the opportunity of junior infrastructure debt – it is ‘sensible’ leverage and has less competition.The downside? This market is – as the name suggests – quite private.
While the Australian market is evolving and poses a strong opportunity in the future, the bulk of opportunities is currently found on foreign shores.To investigate the risk/return more, we have broken down the credit spread into its individual building blocks: default loss risk, downgrade loss, and the residual spread – what is “left over”.
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