Whilst volume-based transportation assets are likely going to materially underperform 2020 budgets, creditors do not appear to be bringing in restructuring teams as may be expected. In fact, we are currently seeing creditors being very collegiate with borrowers on these assets. Lenders seem willing to, at least in the short term, waive default covenants before they are even being tested, as they appreciate this is not a credit event and isn’t something they wish to enforce.
The rating agencies have all come out in force this week with various analytical reports, and the theme among all of these reports is that non-transportation infrastructure will be impacted far less by the pandemic than any other sector. Whilst other GDP-aligned infrastructure, such as ports and freight rolling stock, will feel the pressure of any recession that will no doubt follow the current crisis, the broader infrastructure asset class is expected to weather the storm better than other sectors.
The difference in the last crisis was that assets were over levered, and when swap mark to markets were factored in, some were materially over levered. This isn’t generally the case today, so most GDP-linked assets should be able to better endure a downturn while still demonstrating the robust credit fundamentals that drove the liquidity into the sector from lenders in the first place.
The other key difference is bank liquidity. Whilst we hear that banks’ funding costs are increasing, and the impact of borrowers drawing RCFs en masse means larger funding is required, the banks have capital and access to capital. CDS is always a good reference point for bank funding costs, and the movement in bank CDS following various stimulus announcements, notably the ECB last week, shows that these levels have come back down to be very close to pre-COVID levels. CACIB’s five-year CDS, for example, is less than five basis points wider than it was on 1 February. Post GFC, these took about 18 months to normalise as banks struggled to stay liquid and solvent.
There isn’t really a comparable of PP liquidity after the GFC as there wasn’t much of a focused infrastructure PP market to speak of. Now, the market has dedicated teams and, even more importantly, dedicated pools of capital for those teams to invest. This capital may need to price with the market, but it doesn’t have a higher funding cost and the assigned capital still needs to be invested (in a similar vein to infrastructure equity liquidity).
With very limited borrowers having to do deals at unattractive spreads, there will no doubt be a game of ‘chicken’ between borrowers and PP lenders and, in our view, it will be the lenders who will need to move against the market if they want to place capital. Otherwise, borrowers will bide their time with bank debt and wait for market pricing to normalise.
The real proof, however, that this isn’t like the GFC is that deals are getting done – we’re experiencing this first-hand. Whilst pricing has widened slightly from where we expected a few weeks ago, this has not been a material increase and nowhere near where the secondary benchmarks would suggest. Of course, these may be the last of the ‘good times’, but we think that because this isn’t 2008, we will see more in the months to come.
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