As part of a general round up of recent progress within its business (the major parts of which we have covered in earlier stories), International Public Partnerships has provided its thoughts on the impact of rising interest rates on its business. The elements of the company’s investments that could primarily be impacted as a result are:
- the discount rates applied to the forecast cash flows in order to determine the portfolio’s valuations;
- the amount of interest earned from cash held; and/or
- the cost of any new or replacement debt that needs to be procured.
Discount rates and deposit rates
The company notes that discount rates have not historically moved in lockstep with government bond yields and that demand for infrastructure assets remains very strong. The company also notes that increased cash flows resulting from higher inflation expectations, foreign exchange gains derived from the weakening of sterling, and greater interest earned from cash balances may play a mitigating role in any potential future discount rate valuation movements. The company will formally review the discount rates used to value its investment portfolio as part of the 31 December year-end reporting.
Refinancing risk
There is said to be no material refinancing risk within the company’s PPP or OFTO investments as these investments typically benefit from fixed-rate senior debt which amortises to nil over the relevant concession or licence period. These types of investments collectively represent approximately 60% of the portfolio’s investment fair value.
There are other investments in the portfolio which do not have a pre-determined concession term or licence period, and hence will contain an element of refinance exposure. This statement applies principally to Cadent, Tideway, Angel and BeNEX. These companies have various tranches of debt with different maturity dates, and there is no immediate need to refinance any material portion of debt in these four companies.
The increases in the cost of debt have a limited impact on current debt costs (as the vast majority of debt is either fixed rate or hedged) but could impact these businesses when existing debt is refinanced. However, (i) the regulated revenues earned by Cadent and Tideway are frequently adjusted by the regulator to compensate for changes in the market cost of debt, and (ii) businesses such as Angel and BeNEX that operate in industries with high barriers to entry would typically expect to be able to pass on a majority of changes in their cost base to counterparties.
INPP : International Public Partnerships on the impact of rising interest rates