Infrastructure debt remained resilient during the pandemic
One of the key findings in the Global Infrastructure Hub’s Monitor 2021 is that infrastructure debt provides attractive and resilient returns for investors, consistently performing better than non-infrastructure debt worldwide. This finding is based on the most comprehensive aggregated data on private investment in infrastructure, made possible through the GI Hub’s partnerships with leading global data providers, including Moody’s, and by the GI Hub’s leveraging of data from more than a dozen other international entities and organisations.
At Moody’s, our latest data show that project and infrastructure debt continued to perform well in 2020 and 2021. Despite macroeconomic challenges and related disruptions to the service and transportation sectors, the coronavirus (COVID-19) pandemic–fueled default cycle in 2020–21 was short-lived and much less severe for both project finance and infrastructure credits. That is to say, there were fewer defaults on these investments than during prior credit cycles, such as 2001–04. It was also less severe for the infrastructure asset class than for Moody’s rated universe of non-financial companies.
Rated corporate infrastructure and project finance debt, as well as total rated infrastructure securities, showed greater stability than rated non-financial companies during 2020-21, as measured by the ‘rating drift’. However, the pandemic-fueled default cycle proved to be short-lived and much less severe than prior cycles for both non-financial companies and infrastructure securities, as the strong global economic recovery and abundant liquidity kept defaults low in 2021.
Rating drift is a measure to quantify the overall general credit rating trend and is calculated by the average number of upgrade rating changes per issuer minus the average number of downgrade rating changes per issuer. Positive rating drift indicates an overall improvement in credit quality, while negative rating drift signals deterioration.
Exhibit: Rating drift: Recent credit cycle was less severe for infrastructure debt
Note: Total infrastructure securities includes rated corporate infrastructure and project finance securities plus US municipal infrastructure securities. Corporate infrastructure and project finance securities includes securities issued by either rated corporate infrastructure issuers or rated project finance entities. Non-financial corporate issuers are the benchmark comparison data set of rated global non-financial companies. Rated corporate infrastructure securities are included in this benchmark, while rated project finance entities are excluded.
Source: Moody’s Investors Service
Moreover, Moody’s universe of rated infrastructure entities experienced eight defaults in 2020 and seven in 2021, only slightly higher than the average of four defaults through the period 1983-2021. Heldrich Center Hotel/Conference (Caa3 negative), a hotel and conference center project located in New Brunswick, New Jersey, which defaulted in January 2021, was the only default that can be attributed to the coronavirus pandemic. Defaults in 2020 were concentrated among coal-fired power projects and issuers located in Argentina.
Similar trends were observed in the credit performance of Moody’s universe of 9,836 project finance bank loans through 2020. Defaults in 2020 were consistent with the average annual number of defaults during the period 1983-2020. Average cumulative default rates improved across the board for most industries and regions, with the major exception being the oil and gas sector, which experienced stress as a result of relatively low commodity prices. Project finance bank loan defaults in 2020 were concentrated in North American power, oil and gas projects.
On average, the infrastructure sector has experienced historically lower cumulative default rates and average credit losses than total rated non-financial corporate issuers, as shown in the exhibit below. The divergence in default rates highlights the resilience of the total infrastructure sector even during the pandemic. In general, the pandemic has not led to a material surge in defaults in the infrastructure sector.
Exhibit: Infrastructure securities and project finance bank loans experience on average lower credit losses than nonfinancial companies – 1983-2020
Note: Cumulative loss rates for the rated universes: total infrastructure, corporate infrastructure and project finance and non-financial corporates are calculated based on Moody's definition of default.
Regarding recovery rates, relevant data is still limited for 2020. However, reported average ultimate recoveries included in our data set of unrated project finance bank loans remained stable at 76.8% (Moody’s) for the period 1983-2020. Overall, ultimate recovery rates for project finance bank loans are similar to those for senior secured corporate bank loans and overall corporate bank loans. The average ultimate recovery rate in 2020 was 100% for the project finance bank loan data set, based on a limited number of observations. By comparison, average ultimate recoveries on corporate defaulted debt in 2020 were worse than the historical average.
Recovery rates for corporate debt tend to be higher when default rates fall, and economic conditions improve. Recoveries improved for non-financial companies in 2021 as defaults declined sharply and the economic outlook improved.
Looking ahead, our global default outlook for 2022 will continue to depend on the pace of economic growth, inflation and its impact on central bank monetary policy, and pandemic management. Although we are moving out of the pandemic, evolving geopolitical risks cloud the global default outlook following Russia's invasion of Ukraine. Credit risk is being transmitted through three main channels: commodity price shocks, financial disruption and market volatility, and the potential for broader security challenges.
Total infrastructure securities include rated corporate infrastructure and project finance securities plus US municipal infrastructure securities. Corporate infrastructure and project finance securities includes securities issued by either rated corporate infrastructure issuers or rated project finance entities. Non-financial corporate issuers is the benchmark comparison data set of rated global non-financial companies. Rated corporate infrastructure securities are included in this benchmark, while rated project finance entities are excluded.
Ultimate recoveries refer to the settlement value creditors received when the default was resolved.