While not immune to the consequences of Covid, infrastructure debt proved to be a resilient asset class in 2020 by continuing to generate stable income throughout the year. Key sectors such as telecommunications and utilities encapsulated this resilience through the essential nature of the services provided.
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2020 proved to be an incredibly challenging year for markets as COVID-19 triggered lockdowns. The ensuing societal uncertainties raised volatility levels across most major asset classes.
While not immune to the effects of the pandemic, the proven resilience and stability earmarks infrastructure debt as the ideal investment solution in a post-Covid environment.
The growing demand and appreciation of renewable energy as countries embrace the energy transition, in tandem with the digitalisation movement, represent a significant tailwind for the asset class. For investors searching for stable income with contained volatility, infrastructure debt can be a compelling solution for 2021 and beyond.
2020 – The first true test of fundamentals
As an asset class, infrastructure debt possesses key characteristics that contribute to resilient performance. These include the large physical nature of the underlying asset, high barriers to entry for newcomers and stable revenues linked to the operation and/or construction of the asset.
These key characteristics have allowed a historically strong credit performance with low default rates and high recovery rates (of 0.34% and 76%, respectively) when compared to equivalently rated corporate debt. 
Infrastructure debt typically also delivers relatively high yields compared to equivalently rated corporate debt by virtue of an illiquidity premium. As the projects being financed often have long-term lifespans (of over 10 years), investors are compensated for their commitment with relatively higher yields.
Exhibit 1: Yield premiums for European infrastructure debt relative to equivalently rated corporate debt
Source: BNP Paribas Asset Management, May 2021, Bloomberg. Corporate bonds: Average option-adjusted spreads by credit rating for non-financial corporate bonds (BAML, EN10/EN20/EN30/EN40/HE1C, 30 April 2021). European infrastructure debt: Estimated average based on a sample of market observations.
Despite this attractive risk-return profile, it is worth noting that European infrastructure debt has been readily accessible to non-bank investors only since the late 2000s. This means that from an asset management perspective, the challenges arising from Covid was the first major test to the resilience of infrastructure debt.
Key characteristics and fundamentals
Infrastructure debt broadly involves the financing of loans for projects that provide large, capital-intensive critical assets that underpin economic activity. Typical infrastructure debt finances utilities, power generation systems, telecommunications systems, transportation systems (including roads, bridges, airports and rail networks), as well as other fundamental facilities that provide essential services.
Large physical assets: The projects financed are not only large physical assets, but typically operate in markets with high barriers to entry. These features are beneficial to investors from both a risk and a performance perspective. As infrastructure debt investments have significant underlying collateral in the form of the large physical asset, there is greater security and a higher recovery rate in the event of a material credit event. High barriers to entry reduce potential competition for the services that a project will provide, mitigating risk from a performance perspective.
Stable revenues: Infrastructure debt typically involves regulated and/or contracted revenues. An example is the financing of a photovoltaic (solar) power plant, where there will be priority of dispatch off the grid. That is, there is contractual uptake of the service provided, ensuring stable revenues. Furthermore, many services produced by the infrastructure will bear low technological risk and resilience to economic cycles.
Cash flow-based lending: Investments in infrastructure debt relate to the operation and/or construction of a single asset or a portfolio of assets. From an investor (or lender) perspective, performance is cash flow-focused, with little to no emphasis on the price of the underlying asset.
Portfolio diversifier: As an alternative asset class, the nature and characteristics of infrastructure debt mean there is a low correlation to financial markets, especially against the more traditional asset classes (i.e. equities and core fixed income).
European infrastructure debt: A resilient asset class supported by future trends
While 2020 was an immensely challenging year for financial markets, infrastructure debt proved to be relatively resilient: Many essential projects continued to operate throughout the height of the pandemic. This was not only testament to the quality of the asset class, but a timely reminder of its ability to generate stable income irrespective of market conditions.
Looking ahead, we believe European infrastructure debt is well positioned to perform in the coming years. The asset class is poised to benefit from the digitalisation and energy transition trends, which are a strong tailwind driving demand for telecommunications and renewable energy infrastructure.
Moreover, the infrastructure market should continue to need more financing for projects that provide essential services. In considering this positive outlook together with the core fundamental strengths of the asset class, we believe European infrastructure debt is – and looks set to remain – an attractive investment opportunity.
 Moody’s, Default and Recovery Rates for Project Finance Bank Loans, 1983-2019, Moody’s definition of default
For a comprehensive view of the role European infrastructure debt can play in the post-Covid era, read European infrastructure debt: Resilient and essential in the post-Covid environment written by Karen Azoulay, head of infrastructure debt and lead manager of the BNP Paribas European Infra Debt Fund, a multiple award winning sustainability fund.