However, with the potential material credit impacts of the crisis on borrowers, combined with the issuance from governments for capital to support stimulus packages, an abnormal situation has developed. Benchmark rates in all currencies are now on the rise and IG credit spreads have continued to spike.
Here at DC, we are seeing the impact on the infrastructure credit markets first-hand with a number of live mandates across a variety of sub-sectors including transportation, utilities, liquid bulk storage, telecoms and hybrid assets. This insight is giving us an excellent vantage point on how the infrastructure debt market is currently behaving, reacting and navigating this situation.
Whilst the bank market (who are very focused on reputation) have not yet reneged on any credit or pricing approvals, we understand that new credit applications are on hold for a number of banks – if their CDS is aligned to their funding costs, as anticipated, there will be a need for margins to widen to compensate for additional capital costs. Although quantitative easing will help, we still expect to see a reprice on what are the lowest rates in a decade.
The private placement (PP) market is slightly more dynamic. We are seeing many deals reprice (albeit in a measured manner) where significant work has been undertaken on a deal, and very few examples of participants shutting up shop for the time being. However, given most PP teams are not as equipped as banks to have separate portfolio and restructuring teams, the origination staff are very busy working on assessing the potential impact of the situation on their portfolios. As a result, we expect a number of PP funds to struggle to resource new deals. That being said, there are a few who are very much open to using this as an opportunity to deploy capital.
Lenders and borrowers will no doubt be focused on existing financings which are currently, or will soon come, under pressure in the coming weeks. The obvious sector where we are seeing strain is the transportation space. Whilst borrowers are taking early and decisive action here, lenders are keen to know how stimulus packages will impact the credits in the medium term.
The market isn’t, however, all doom and gloom. There will be a flight to quality that will benefit the infrastructure space as the new ‘norm’ stabilises over the next weeks. The deals we are working on continue to progress (albeit at a slightly slower ‘working from home pace’), and there are still large pools of debt and equity capital that need to be invested. We have had far more calls with debt investors telling us they are open and want to deploy capital than from lenders who are struggling.
Navigating the next few weeks will no doubt be challenging, but we are here to help you as much as we can.
As ever, we are here to advise our clients in good times as well as periods of uncertainty, and we would be delighted to informally discuss the market or specific questions you may have.
Please do feel free to reach out to the team and download our credit market update.