The EDHEC-Risk Institute has published a new report — Unlisted Infrastructure Debt Valuation and Performance Measurement — a valuation and risk measurement framework for illiquid infrastructure debt.
According to the authors, the report shows that infrastructure debt has a dynamic performance profile and that risk levels are strongly influenced by lenders’ options to restructure or liquidate. Overall, risk levels are found to be low, and expected recovery is found to be high. The paper also highlights the existence of a trade-off between credit risk and duration risk, which is unique to infrastructure debt.
“Long-term infrastructure debt poses a significant pricing challenge with no market prices, private cash flow data scattered amongst originators, and covenant structures creating ‘embedded options’ that are not taken into account in standard valuation models,” notes an EDHEC statement. “Taking these characteristics into account is instrumental to capturing the expected performance of infrastructure debt.”
The report was produced from the Natixis research chair at EDHEC-Risk Institute on the Investment and Governance Characteristics of Infrastructure Debt Instruments. It is one of the “stepping stones” of a roadmap established by EDHEC-Risk Institute toward the creation of adequate performance measurement tools for long-term investors in infrastructure.
A copy of the full report is available here.