A multi-decade high inflation, aggressive monetary policy tightening by the central banks, and the effects of the Russia/Ukraine war, have led to a highly volatile first three quarters of 2022, and infrastructure, though more resilient, wasn’t completely immune to all these effects.

The infra300® index, which tracks a representative global sample of unlisted infrastructure equity investments worth more than USD 200bn, ended the quarter slightly lower by -0.17% (local currency returns) and is down 5.01% YTD 2022. The one-year return has reduced to 2.44% after two consecutive months of negative returns. The rise in interest rates is still the most significant factor impacting the discount rates and the valuations. However, the risk premium has reduced over the last 1 year and combined with the higher inflation-linked cash flow forecast, has offset more than half of the negative interest rates’ impact on the valuations.

Companies with merchant business model (TICCS® BR-2) have recovered well from the Covid downturns and are expected to grow their revenues at 4.3% over the next 2 years, faster than the historical average of 1.7%. They continued to be the strong performers in this quarter and contributed 0.54% to the infra300 index. Looking at the corporate governance structures (TICCS® – CG), the project financed companies in the EDHECinfra universe, dominated by lower-risk companies with contracted business risk (TICCS® – BR 1), saw a 32bps drop in their risk premia and reported a quarterly total return of 3.40% (local currency).

At the sector level, transport (TICCS® – IC60) sector is once again the largest beneficiary of the fall in risk premia and contributed the most to the infra300 index performance. In particular, the equity risk premia in airports have reduced by more than 40bps over the quarter and is back at the pre-Covid level after a reduction of more than 100bps since the peak in 2021. Power generation assets (TICCS® – IC10) and data infrastructure (TICCS® – IC50) were the two other sectors in the positive territory over this quarter.

Core segment of the infrastructure market had the smallest reduction in the risk premia (32bps) in this quarter and returned -3.13% (local currency) due to the overall increase in discount rates. In comparison, Core+ and opportunistic segments performed a lot better with 0.27% and 6.68% return respectively (local currency).

On the credit side, yield-to-maturity for the global infrastructure debt market has risen again this quarter by 1.4% (more than doubled in 2022) and is now at 6%. Most infrastructure debt is of investment-grade quality and the bulk of this increase in yield is the result of higher interest rates, as opposed to credit spreads which have only gone up by 20bps in this quarter. Project financed debt, with an increase of 4bps in credit spread, has performed much better in Q3 2022 as compared to corporate debt, which saw spreads increase by 34bps.

As a result of the sharp increase in yields, EDHECinfra’s flagship debt index, the infra300® Debt index, returned -5.08% and -13.4% in Q3 and YTD 2022 respectively (local currency). This index represents the performance of the most recent senior debt instruments issued by the constituents in the infra300® equity index. It includes close to 370 senior debt instruments with a market capitalisation of more than USD 70bn. Long term debt index was affected the worst by the rise in yields because of its longer duration and returned -8.27% in Q3 2022 (local currency).

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