Mixed implications for infrastructure as COVID-19 outbreak continues | AMP Capital

COVID-19: Impacts on Infrastructure

AMP Capital believes infrastructure, as an asset class, offers defensive positioning that makes it an attractive inclusion in a portfolio in an environment such as the one we are currently facing.

That’s not to say that individual infrastructure assets won’t be exposed to significant risk from the COVID-19 outbreak, however, in our view, a number of defining characteristics of the sector – consistent returns, lower volatility, and reliable long-term income yields – mean that a well-diversified infrastructure portfolio is well-placed to weather the downturn, relative to many other asset classes.

As infrastructure assets commonly provide essential services, demand is less elastic than in many other sectors, and utilisation is often less exposed to adverse economic conditions. Generally, returns for these assets are consequentially more consistent and subject to less volatility than for comparable assets outside the sector, as illustrated in the following chart.

Figure 1: Return and volatility of selected asset classes, 10 years to 30 June 2019.¹

Infrastructure revenues are often underpinned by regulation or long-term contracts, which provide a high level of visibility and certainty relating to future cashflows from the asset.

In assessing risk within an infrastructure portfolio in the current environment, it is important to understand the extent to which these characteristics apply to the assets in question.

Three categories become apparent:

Public-Private Partnerships (PPPs)

PPPs are commonly used by governments to deliver infrastructure projects such as roads, hospitals, schools and public transport systems.

These are, for the most part, “availability” assets, where revenues are paid on the condition that the asset remains available for use, regardless of actual patronage, and the counterparty to these contracts is often a highly creditworthy government body. The concessions awarded on these assets often last decades, and they are highly resistant to economic downturns.

Regulated utilities

Whilst utilities may not enjoy the same level of contractual protection as PPPs, in many cases they are still insulated to a significant degree from economic contraction by the nature of their business. They typically deliver essential services such as water and electricity, for which demand persists even in downturns. In addition, pricing is often regulated and unresponsive to short-term economic fluctuations.

Other economic infrastructure

In our view, assets with volume-based revenue carry the most obvious potential for negative exposure to the current economic climate. This risk will vary from asset to asset, depending on their business model and proximity to the areas most affected by the virus and measures designed to contain it.

Beyond the characteristics of each asset in a portfolio, attention should be paid to the action taken by asset managers to protect value and mitigate risks associated with the outbreak. At AMP Capital in the Global Infrastructure Equity team, we are taking proactive concrete steps to manage risk from COVID-19 in our assets, including:

• Ensuring a safe working environment for employees & customers
• Considering financial impacts, and preparing for any material impacts to revenues
• Implementing contingency measures contained within Pandemic and Business Continuity Plans
• Considering the potential impacts on supply chain and inventory and mitigating risks around supply chain disruption, including alternative sourcing.

Other key considerations include diversification, which at times of extreme uncertainty is crucial not only across a portfolio but within the asset classes contained in that portfolio. For example, a pure transport infrastructure portfolio which is concentrated in patronage or volume assets is, in our view, likely a much riskier play than a portfolio that is well diversified across a broad range of categories of infrastructure.

Finally, the business fundamentals of each asset need to be taken into consideration, including the extent to which it is leveraged, the resilience of its cash flows, and its ability to meet requirements such as debt covenants, refinancing and working capital throughout the period of the downturn.

John Julian, Investment Director

Original Author: Produced by AMP Capital and published on 18/03/2020 Source