“Infrastructure debt still delivers an attractive risk/reward”

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Please note that this article may contain technical language. For this reason, it is not recommended to readers without professional investment experience.

Karen Azoulay, head of infrastructure debt, discusses how BNP Paribas Asset Management (BNPP AM) is positioned at a time when governments are focusing more on renovating existing infrastructure and want to call on private funding to a greater extent.

One key objective is assisting local government authorities in rolling out ultra-high-speed internet.

You joined the new Private Debt and Real Assets department to manage the infrastructure business. What are you aiming to achieve and what are your work methods?

In June 2017, we set up a department dedicated to private debt and real assets, with three teams:

  1. Real Assets, Small and Medium-sized Enterprise (SME) Loans, and Structured Finance (including infrastructure debt and real-estate debt)
  2. Global Loans
  3. SME Advanced Solutions, which, within BNPP AM, is developing an alternative pan-European platform for lending to SMEs.

This new department plans to develop a comprehensive offering of private debt solutions while capitalising on homogeneous work methods based on BNPP AM’s legal, ESG (environment, social & governance) and credit research skills.

My team specialises in senior European infrastructure debt covering projects whose common trait is that they provide essential public goods and services, have high entry barriers and can generate steady and long-lasting cash flows.

We have recruited a team of experienced professionals who are fully operational, with long-standing experience in this field, as they have worked for the major corporate and investment banks.

Does this experience give you greater access to sourcing?

In our business, sourcing is the key to success. All team members have their own origination networks and have long worked alongside banks, as well as industrial and financial sponsors (infrastructure funds) that are directly involved in building, managing and funding infrastructure projects.

We also enjoy special access to BNP Paribas Group’s projects. This extensive origination capacity has allowed us to get in on projects on the ground floor and to take part in defining them so as to achieve an attractive risk/reward. This ensures that we deploy the capital raised within the allotted time periods.

Do you work alongside local government?

Like central government, local government authorities are increasingly using private partnerships to operate and finance public infrastructure projects and thus share the risks via a more efficient business model.

We are more closely connected to private operators who work directly with local government as we are involved only as a lender during the funding phase. Calls for bids on public procurement projects include all aspects – technical, operational and funding. When they bid on such projects, industrial or financial sponsors must ensure that they have the support of financiers for carrying out the projects. That’s when they contact us.

What are the most common development models in France?

There are two main types of infrastructure funding models for public procurement contracts:

PPPs are often called ‘availability-based projects’, i.e. the private partner receives payments with penalties deducted in the event that the asset is unavailable for use and/or performance criteria are not met.

Under the concession model, which most often carries a ‘demand-volume risk’, the partner directly bears the risk of demand for the asset (for example, in a volume-risk motorway concession, the number of vehicles that use the motorway has a direct impact on the private partner).

At the latest Infraweek conference, in Paris in October 2017, the French Minister of the Economy said he was more inclined to renovate and optimise existing infrastructure than to create new infrastructure projects. This is especially true in the field of transportation, where the focus is now on commuter transport, rail networks and the ‘Grand Paris’ project.

The minister also said he wanted to call on private funding to a greater extent for public infrastructure. This is particularly the case with concessions that allow public entities to outsource asset construction, funding and operation by sharing risk between the private and public sectors.

Is there an official focus on energy transition projects in France?

The transition to a renewable-energy world is indeed a real challenge for public authorities. They are now focusing on projects that will help them reach their greenhouse gas emission reduction targets, while promoting green growth.

In recent years, we have seen a major acceleration in the number of renewable energy projects (wind, solar, biomass, etc.), clean transport and energy efficiency. We have a keen interest in the issues of energy transition, renewable energies and in ESG in general. We are keeping a close eye on ESG and include its impact in our investments.

This is, in fact, one of our platform’s special features. Among other major sector trends, the digitalisation of the economy is also an official priority. Local government authorities, including cities, are currently rallying around ultra-high-speed internet for the purpose of opening up under-served rural areas and cities to make them more economically attractive. We want to assist local government in these projects, in which we have strong expertise.

Lower yields are spreading to all assets, including infrastructure debt. Is this a concern for institutional investors?

Lower yields are a concern for all institutional investors, but infrastructure debt continues to deliver an attractive risk/reward payoff compared to other assets.

The default rate is very low and when there is a default, the recovery rate is very high. Infrastructure debt is also being encouraged by regulation. Solvency 2, for example, which covers insurance companies, was recently adjusted to reflect the special features of infrastructure debt, leading to a lower capital charge on this type of investment.

Moreover, while infrastructure debt had long been considered a mere bond alternative, it is now assessed on the basis of its own characteristics. It has become an asset class in its own right in which institutional investors are structurally invested.

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The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is not indicative of future performance.

This interview was conducted with Claire Nizart for Institutional Investor.


Other posts on infrastructure debt

Karen Azoulay

Head of Infrastructure Debt

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