- published on 05/12/2013
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Infastructure investments – both listed and unlisted – have been caught up in the credit and equity market gyrations, but they should continue to deliver on their longer-term expectations, according to a briefing note from Mercer Investment Consulting.
Dragana Timotijevic, Mercer’s Sydney-based head of alternatives research, says in the paper that there is low near-term refinancing risk among the 25 companies in the listed Australian Infrastructure and Utilities Index and little impact from recent rate movements on cashflows of infrastructure companies. Research by UBS shows that 70 per cent of debt for those companies is at fixed rates for at least five years and the average term of expiry for infrastructure debt is 6.9 years and for utilities is 4.6 years. “Overall, in the near term, infrastructure investments are unlikely to be negatively impacted by the widening in credit spreads,” Timotijevic says. “This is due to the relatively low level of gearing (in the listed sector), long-term debt profiles and the high level of hedging that exists in the current debt structures of infrastructure companies. “However, the investment environment has changed… With the recent repricing of risk, the cost of doing business has increased and valuations have come down to more reasonable levels. This will make some marginal investments less attractive. “The worldwide trend towards increased infrastructure spending and rising securitisation of regulated infrastructure assets has not been significantly impacted by the recent sub-prime driven events. Bonds, cash rates and inflation remain below the rates used in the managers’ valuation processes and the global growth and industry dynamics indicate continuing patronage growth. “If the world economy slows, returns on regulated utilities should largely be unaffected as the increased cost of equity and debt for many sectors will be recouped in tariffs. Unregulated gas and electricity businesses with take-or-pay contracts will also continue to do well. Tollroad companies, however, will probably experience slower traffic growth, while airports, which are the most cyclical asset, will be the worst off.”