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    Examining Infrastructure as an Asset Class

    May 2020

    Examining Infrastructure as an Asset Class

    Overview
    Moody’s Analytics Project Finance Data Consortium was established in 2010 with leading sector lenders to study the credit profile of project finance bank loans. In response to increasing regulatory pressure and funding costs, the consortium was designed to enhance the understanding of default and recovery behavior and to facilitate further evolution of the asset class. Furthermore, the participants—which now number 75 global institutions (banks, insurance companies, and asset managers)—view the consortium as a key to promote transparency, increase liquidity, and assist with capital relief under Basel capital requirements.

    Moody’s Analytics collected data from 8,583 project loans and losses (consortium dataset) from the consortium members. The project loans originated from 1983–2018. The dataset contains 587 project loan defaults based on the Basel definition of default and 289 ultimate recoveries. The definitions of project finance, the Basel definition of default, and ultimate recovery can be found in the glossary.

    Working with Moody’s Investors Service, a study has been published each year. This research highlights current trends and gives an overview of the performance of the 8,583 projects and covered the period from 1983–2018. The link to the Moody’s Investors Service March 9, 2020 published report can be found in the glossary.

    For this analysis, 7,047 of the 8,583 projects—adopting a wider definition of infrastructure than the Social, Transportation and Environmental sectors than the annual study uses—were selected from subindustries within the Social, Transportation, Water and Waste, Media and Telecom, Oil and Gas, and Power sectors. The subindustries include 1,006 Social projects with 19 defaults, 1,114 Transportation projects with 97 defaults, 305 Water and Waste projects with 18 defaults, 68 Other infrastructure projects with 5 defaults, 395 Media and Telecom projects with 46 defaults, 278 Oil and Gas distribution and refining projects with 17 defaults, and 3,881 Power generation and transmission projects with 240 defaults. Within infrastructure, there are 5,909 projects in high-income countries with 335 defaults, and 1,138 projects in middle- and low-income countries with 107 defaults.

    The purpose of this research is to highlight the credit behavior of infrastructure project loans and compare the performance of high-income economies with middle- and low-income economies. Cumulative default rates (CDRs) from subsets of the 7,047 infrastructure loans will be compared to CDRs taken from Moody’s Investors Service-published research. The research focuses on default and recovery rates for corporate bond, loan and deposit issuers rated in the Aaa, A, Baa, Ba, and B rating categories for the period 1983–2018. A link to that report can be found in the glossary.

    Database composition
    Figure 1 presents the concentration of projects and defaults for the infrastructure project loans in each sector. Most of the industry sectors have similar concentrations of projects and defaults. Social projects show a lower default concentration than the remaining industries, while Media and Telecom and Transportation show higher default concentrations. 

    Infrastructure debt performance
    Figure 2 compares the 20-year CDR for the infrastructure project loans of 5.3%. It is consistent with the 20-year CDRs for corporate issuers of low investment-grade credit quality. By comparison, corresponding CDRs for Baa1, 2, and 3-rated; Ba1, 2, and 3-rated; and B-rated corporates are 5.8%, 8.1%, 11.7%, 18.2%, 18.7%, 38.9%, and 47.5% respectively.

    The CDRs from the infrastructure project loans flatten out and perform as investment grade by year 10. This indicates a decreasing amount of risk as the loans mature—unlike corporate debt, which displays increasing CDRs over time. The marginal default rates—the likelihood of defaulting during a given year—for infrastructure project loans are less than 0.01% by year 17 and 0% as the loans approach 20 years.