Martin Bennett, Marsh
Martin heads infrastructure advisory services for transactions across the Europe, Middle East and Africa region, and has led teams in over 200 infrastructure sector transactions.
At the table
Sergio Ronga, DC Advisory
Sergio is a managing director in DC’s debt advisory team, advising clients on the infrastructure and social service sectors.
Chris McMonagle, Mott MacDonald
Chris heads Mott MacDonald's investment transaction advisory business stream within the infrastructure finance and investments division, with a primary focus on project finance and private equity investors.
Romain Py, JP Morgan Infrastructure Investing
Romain is an executive director in JP Morgan's infrastructure division, joining in 2007. He previously worked for HSBC's infrastructure finance team.
The eurozone crisis is clearly affecting all asset classes. What sort of impact is it having on the infrastructure space, particularly investment strategies?
Py: Everybody is aware of the direct impact: the ability to do deals has become questionable and most of the time debt just isn’t there or comes at a very high price. However, the indirect impacts should be considered too, notably the very high prices paid for regulated assets in Northern Europe. It seems that some investors see sovereign bond premiums as a proxy for regulatory and political risk. These low levels of returns do not seem to be commensurate with the risks and could become questionable if the current low interest rate environment does not remain.
The impact of the eurozone crisis is becoming a more and more complicated subject and will differ between sector. For example, we have ports in Spain and we’ve had to run euro exit scenarios to understand what the potential risks are and what an impact of such an exit on our investment could be.
If you look around the world, ports and airports tend to have hard currency-denominated revenues – US dollars or euros. So, funnily enough, in a devaluation scenario costs actually come down, which will be beneficial to the company. Clearly that will not happen with a toll road which has local currency revenues.
The way that investors look at Spain as one country or asset class is not helpful. Spain, like Germany, is decentralised with different regions and levels of local government, and you need to understand this counter-party risk. That counter-party may not be who’s making payments to you, but the person on the other side of a contract, or in some cases the regulator.
You need to have a much more detailed approach and most investors don’t have the
skills or the resources to do that. Europe is quite heterogeneous and this is different from the UK. Investors often forget that or lack that perspective.
Investors must also think long-term and be consistent with their investment strategy. Being driven by the daily bond yield movement or what they read about in the newspapers is not a sophisticated or long-term approach. If you look at the spread between Spain’s ten and 20-year bonds, it’s actually reduced over the last 12 months, suggesting that investors are more concerned by the short-to-medium term.
Ronga: Despite the current eurozone uncertainty, opportunities are still coming through. The German auction for Open Grid was very successful and we see that success continuing. The reality is that many regional governments and corporates are overlevered and there’s an opportunity from them privatising or disposing of assets.
McMonagle: I totally agree in terms of opportunities. It’s also important to realise
that infrastructure is not one sector. It’s lots of different sectors and regions – it’s a big matrix of complexity. Investors need to know that and be careful not to treat its different sub-sectors as a single asset class.
Geographically, larger funds can look at different sub-sectors in different countries and get diversity. Interestingly, it is the funds that are generally focused on a more limited geographical region that are approaching us currently and asking what’s going on in other countries. They realise the need to secure a pipeline and are not totally convinced by looking at a limited region as they’re not sure what’s going to happen there.