Infrastructure debt passed the stress test of the COVID-19 pandemic
Source: Moody's (2022). Data as of 2020
The COVID-19 pandemic acted like a stress test for investment risk and demonstrated the resilience of infrastructure assets to adverse economic scenarios.
The credit risk metrics for debt are default rates and recovery rates. These metrics improved for infrastructure debt during the COVID-19 pandemic, while worsening for non-infrastructure debt.
- The average cumulative default rate over a 20-year loan period was 5.4% for infrastructure debt in 2019 for loans that originated between 1983 and 2019. This default rate improved to 5.0% with the inclusion of 2020 data. In contrast, the default rate worsened for non-infrastructure debt from 8.2% as of 2019 to 8.9% with the inclusion of 2020 data.
- Similarly, recovery rates following default improved for infrastructure debt during the pandemic. In 2020, the recovery rate was 83.6%, slightly higher than the 2019 rate of 83.3%. Recovery rates following default materially worsened for non-infrastructure debt, from about 80% in 2019 to 67.8% in 2020.
The discrepancy in recovery rates could be a result of the infrastructure sector having more backing by public sector entities, including governments and multilateral development banks, than other economic sectors. In addition, the essential nature of the commodities provided by the infrastructure sector ensures that demand remains strong during economic downturns.
Did the credit risk resilience of infrastructure debt during the COVID-19 pandemic differ across country income groups?
The reduction in default rates on infrastructure debt was similar across country income groups. In high-income countries, the default rate improved to 4.8% in 2020 from 5.2% in 2019. In middle- and low-income countries, the default rate improved to 6.5% in 2020 from 7.0% in 2019.
Did the credit risk resilience of infrastructure loans during the COVID-19 pandemic differ across infrastructure sectors?
All infrastructure sectors showed better default rates in 2020 than 2019, with the exception of the telecommunications sector in high-income countries – for which the default rate increased from 9.1% in 2019 to 9.8% in 2020. This could be because disruptive innovations in this sector frequently result in greater need for investment to develop new infrastructure, while lowering returns on older investments, which has added to default risk and debt stress. The sector also saw revenue decline from reduced use of roaming functionality due to travel restrictions during lockdowns, a decline in equipment sales as a result of store closures, and the postponement of in-premise customer installations according to the International Telecommunication Union.
The most significant improvement in a sector’s performance during the pandemic was the improvement in the social sector in middle- and low-income countries. The 20-year cumulative default rate fell from 9.0% in 2019 to 5.9% in 2020 in middle- and low- income countries. The number of years to achieve investment-grade performance fell from 17 years to 12 years. This seems likely to have resulted from increased government attention to this sector during the pandemic translating to greater support for projects, and from strong and sustained consumer demand for social services – especially health services – during the pandemic.
Infrastructure debt is resilient to economic turbulence
Infrastructure debt has a strong performance track record. If the COVID-19 pandemic has been a stress test, it’s fair to say infrastructure debt exhibits greater resilience to economic turbulence than non-infrastructure debt. In a global economy that continues to be marred by heightened economic uncertainty, the resilience and stability of infrastructure only increases its attractiveness as an asset class among private investors.
Source: Moody's (2022). Data as of 2020