DC Advisory's global infrastructure debt market update - 9 April 2020

Asset credit bifurcation is impeding the leverage loan and high yield community, with some of the more illiquid assets already seeing signs of distress. While there was perceived to be a general market overreaction in all asset classes in late March, there is now clear acknowledgement that not all leveraged finance credits are equal – some assets, such as German meeting company Techem which saw spreads peaking to high 500s, are now back to low 300s.

The infrastructure market is improving week by week, in a similar fashion to other investment grade credits. Although the European market is improving at a snail’s pace – with the BBB EUR infrastructure iBoxx relatively flat for the last 15 days – this is not the same trend we have seen in the USD and GBP markets with spreads tightening notably. So how has this been influenced by the different sub-sectors?

This static level isn’t being driven solely by negative news affecting transport and GDP-related assets, as they’re only 10% of the index, and it should be noted that downgrades in these assets are still limited in number (which would result in being dropped from the BBB index in any case). However, it’s also worth noting that this week has seen the first high profile ‘fallen angel’ (Atlantia SpA’s $16bn of debt).

Given the other 90% of the index comprises power and utilities and that there have also been some positive macroeconomic movements, with a ‘flattening’ of the COVID curve and a more buoyant oil and gas market, we would have expected the EUR market to follow the trend of the USD and GBP markets. Looking solely at European regulated utilities, which should be relatively insulated from the effects of the COVID-19 crisis, the spreads on these assets have, again, remained relatively flat notwithstanding some potential merchant power risk.

This leaves us questioning, what is different in Europe? Is the European market just slow to react, waiting for improved fiscal and monetary measures from European bodies? Is the market concerned by the lack of a coordinated response from Europe? Or, is it the fear that Southern European economies who are suffering more than most and who went into the pandemic in a weak position already (they are almost a third of the index)? Whatever the reasons, it is not just in infrastructure that the European market is dislocating from the US and UK, but rather we are seeing the same trend in credits for all sectors.

What is important in EUR is the amount of debt fund liquidity, which as we discussed last week can price deals against the market benchmarks, which is good for borrowers. With all this uncertainty, we are seeing borrowers stall processes and waiting to see if the credit market continues to improve over the coming weeks as anticipated. Even the high yield bond market is set to reopen next week according to various news sources.

But the question on our minds is still who will ‘blink’ first, given there are very few borrowers in the infrastructure space who need liquidity or to refinance – our assumption is on the lenders who will need to lend money in infrastructure as part of their mandates. This is something we are seeing a number of lenders wake up to, and we have had a handful of reverse enquiries this week from lenders offering to increase participations in existing deals at pricing which is not far off where borrowers would accept. We anticipate it will only be a few weeks before we see these trades set the scene for the post-COVID-19 world.

We would be delighted to informally discuss the market or specific questions you may have.