GLOBAL - Infrastructure investors could find themselves saddled with underperforming assets and the banks that funded them with “paralysed” debt, according to a report published by ratings agency Standard & Poor’s.
Report author Mike Wilson, managing director of infrastructure finance ratings at the firm, said “relatively slack covenants” had “dragged down credit quality across the infrastructure sector”.
The report claimed the current credit crunch which ended 18 months of favourable debt terms could paralyse loosely structured leverage worth $34bn (€24.6bn).
That said, the result will now be financing that is “better structured, covenanted and leveraged”, according to Wilson.
In many cases, infrastructure assets had not delivered cashflow strengths expected by investors, he said. He cited the highly-leveraged acquisition of Associated British Ports (ABP) through a consortium led by Borealis, the infrastructure subsidiary of the Ontario Municipal Employees Retirement System (OMERS).
“Not all assets can be assumed investment grade,” the report said. “Despite the asset’s strong monopolistic position and stable cash flow, these terms are unlikely to fully mitigate risk arising from the high level of debt. Nor are they likely to mitigate market risks such as the increasing environmental and regulatory hurdles limiting ABP’s ability to expand capacity in the future.”
Wilson was yet more critical of leveraged acquisitions of assets not traditionally considered as infrastructure, such as car parks and service stations as “even less suited to supporting such high debt multiples”.
He urged investors to scrutinise individual transactions, using hybrid (debt) structuring techniques for infrastructure operating within monopolistic environments with stable cash flows over the long term.
In the meantime, he told IPE Real Estate he expected a shake-out “only after some deals have gone into distress”.
Yet he remains optimistic for the asset class. “Infrastructure as an asset class is still very strong, it’s just the relativities had got out of hand,” said Wilson.
In a separate development, Palmer Capital Partners (PCP), the private equity firm, has sold 85 petrol stations to an undisclosed purchaser for £175m (€257m).
The property group acquired the service stations, which are let to UK retailer Somerfield, just over two years ago.
“It wasn’t the fact that they were service stations that interested us,” said a director at the firm. “They had occupiers we could work with on planning and redeveloping them.”