Ocorian: Inflation and rates biggest challenge for infrastructure lenders
Rising inflation and interest rates are the biggest challenge for the European infrastructure lending market’s ongoing growth, new research from Nordic Trustee, and Ocorian company, show.
Its study found nearly one in three (31%) infrastructure and private credit fund managers, investment bankers working in private credit and senior executives at infrastructure providers highlight worries about the impact of inflation and high interest rates on hurdle rates.
The research across the UK, Germany, Switzerland, France, Italy and Sweden found 25% of respondents highlight spread compression as the biggest challenge for the sector way ahead of other potential challenges including limited deal flow, covenant erosion and government policy changes. Just 6% point to potential cost overruns on projects as a major challenge for infrastructure lenders.
However when asked to rank risks to infrastructure projects across Europe the survey pointed to regulatory and political risks along with market risks such as demand for lending and pricing volatility as the biggest risks.
Geopolitical risks, project specific risks and the potential for the use of the infrastructure project to fail to meet expectations ranked lower but still ahead of financial risks such as leverage and repayment.
The concern about regulatory and political risks helps point to the most important ways to address those concerns with fund managers, investment bankers and infrastructure firms prioritising legal protections, the use of insurance and hedging as well as government guarantees or backing.
The research found fund managers, investment bankers and infrastructure providers are united in agreement that lenders and investors in the market now increasingly favour lower-risk brownfield sites which offer more stability over greenfield projects.