Sector focus: European infrastructure financing flows | White & Case LLP

HEADLINES

• Global infrastructure debt refinancing issuance reached US$222.8 billion in 2022, versus US$260.7 billion in 2021
• Infrastructure issuers have been shielded from rising debt costs as most capital structures are hedged or have fixed interest rate charges
• Rapid growth in provision of infrastructure finance from private debt providers adds to the options open to borrowers
• Telecoms infrastructure and energy transition key drivers of activity

In the face of rising interest rates and macro-economic uncertainty, infrastructure finance has proven relatively resilient when compared to the dislocation in other debt markets.

Infrastructure’s fundamental characteristics as an asset class anchored by predictable, long-term revenue streams that are often linked to inflation have positioned the sector well to withstand recessionary risk and choppy markets. Investors nervous about inflation and its impact on company profit margins have seen infrastructure as a safe haven and continue to allocate capital to the asset class.

European infrastructure deal activity has remained robust as result, with private equity (PE) investment in European infrastructure climbing to more than US$40 billion by the end of Q3 2022, reaching a five-year high, according to Pitchbook.

Large infrastructure transactions, such as Blackstone’s €21 billion acquisition of “last-mile” logistics asset Mileway, have continued to progress, and infrastructure managers have attracted significant support from investors when raising new funds. Global asset manager player Brookfield announced a US$21 billion first close for its flagship infrastructure fund in November 2022, while Antin has raised €5 billion towards its fifth fund, which is targeting €10 billion and will be the infrastructure-focused manager’s largest vehicle ever. Ardian Infrastructure also launched its latest Europe-focused flagship fund—Ardian Infrastructure Fund VI—with a €10 billion target, targeting brownfield transport, environment, renewables and energy assets in Europe.

With funding continuing to flow into new infrastructure vehicles, demand for assets and valuations has held up in the face of volatility, with vendors maintaining high valuation expectations. CK Infrastructure Holdings, fronted by Hong Kong billionaire Li Ka-shing, for example, pulled out of a £15 billion deal to sell British electricity distributor UK Power Networks to a consortium led by KKR and Macquarie because the buyers were not willing to go ahead when the selling price was increased.

Infrastructure lenders open for business

With deal activity and valuations holding up and infrastructure managers still raising new funds, the pipeline of opportunities for lenders to finance infrastructure deals has continued to flow.

According to Infralogic, for example, global infrastructure debt refinancing issuance across loans and capital markets came in at US$222.8 billion in 2022 versus US$260.7 billion in 2021. Although down year-year-year, the drop in infrastructure refinancing issuance has not been as steep as that observed in leveraged loan and high yield bond markets overall. Infrastructure debt refinancing issuance remains above pre-pandemic levels.

In addition to traditional bank, private placement and capital market financing sources, infrastructure dealmakers have been able to turn to a growing cohort of infrastructure debt funds to source capital for deals.

According to Infrastructure Investor, capital raised by infrastructure debt funds mushroomed from approximately US$80 billion to more than US$139 billion between 2020 and 2022. The growth in the number of private infrastructure debt players has driven the development of a wide spread of financing products (including junior debt strategies) targeting a mix of infrastructure deals. These range from classic infrastructure assets such as utilities, roads, rail and ports into other areas such as broadband roll-out, data centres and logistics, which offer investors different risk/reward metrics.

The ability of infrastructure lenders across all categories—banks, capital markets and funds—to continue lending has also been boosted by the stability of issuers and infrastructure portfolios.

According to ratings agency Fitch, issuers of infrastructure and project finance in Europe, the Middle East and Africa are well placed to navigate rising debt costs and refinancing. More than four-fifths of the issuers tracked by Fitch either have fixed rate interest rate structures or floating rate structures that are hedged against rising rates. Most issuers also have access to bank and capital markets and processes in place to refinance borrowings well ahead of maturities.

Data centres and the energy transition drive deals

Looking ahead to 2023, infrastructure’s solid foundations and inflation-hedging attributes should sustain deal and financing activity, particularly in the telecoms infrastructure and energy transition sub-sectors.

With remote working, data analytics and digitally enabled service provision now embedded across all industries, there has been a huge demand for data centre and other telecoms infrastructure to support this accelerating usage.

As a result, despite a significant slowdown across wider M&A markets, activity from trade buyers and PE firms in the data centre space, for example, has barely missed a beat. Data from Synergy Research forecasts that data centre M&A value in 2022 could exceed the record US$41 billion in activity registered in 2021. Big-ticket data centre deals secured in 2022 include KKR and Global Investment Partners teaming up to buy CyrusOne for US$15 billion, while, on the strategic buyer side, DigitalBridge made an US$11 billion bid to take Switch private.

Robust data centre M&A activity has filtered through to debt markets, with lender appetite to finance transactions where enterprise value multiples are still running strong at approximately 25x EBITDA—and occasionally higher. These deals have tapped a range of financing pools, including acquisition, real estate and infrastructure financing. Although sponsors are now turning their attention to building out data centre assets rather than selling on, multiples and debt supply have remained robust when data centres do change hands.

Adjacent technology areas like telecom towers are also expected to generate substantial opportunity. This has already been seen in deals like the €10 billion bid by Brookfield Infrastructure Partners and DigitalBridge for a 51 per cent stake in Deutsche Telekom’s tower company, GD Towers, in July 2022. According to Debtwire Par, this was the largest telecom towers-related deal in the past two years, and it may not be the last—Telenor is reportedly preparing to carve out its tower portfolio for next year, while Telefonica’s tower business Cornerstone, along with Liberty Global and Vantage Towers, are all potential deals for 2023.

The urgency of tackling climate change, meanwhile, has made investment in infrastructure with a focus on energy transition another busy area that could be relatively insulated from macro headwinds. This is not something governments can afford to delay and—with McKinsey forecasting that the world will have to invest US$275 trillion by 2050 (or US$9.2 trillion a year) to deliver on net-zero pledges by 2050—the runway for infrastructure investors and lenders will be vast. Multiple opportunities to invest in energy transition across the entire risk spectrum are already emerging.

In addition to the priority given to energy transition and the growing demand for investment in data centre infrastructure, the day-to-day financing requirements for capital expenditure and government investment in infrastructure as a tool to support economic recovery will put the finance ecosystem on a sure footing in 2023.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2023 White & Case LLP}