Revisiting Infrastructure - Does It Still Make Sense For Pension Scheme Investment?

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<ul><li> 1. Private &amp; Confidential Investing in Infrastructure 24 June 2014 1 REVISITING INFRASTRUCTURE DOES IT STILL MAKE SENSE FOR PENSION SCHEME INVESTMENT ? </li> <li> 2. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Investing in Infrastructure everyones doing it! 2 Friends Life 500mn mandate with Met Life To invest in UK-based senior secured bilateral loans To back UK annuities Met Life also backed by other UK mid-sized insurers Lancashire County Pension Fund 12m bond in community-owned solar power station in Oxfordshire Part of debt financing for project Index linked debt with a 23-year repayment period Universities Superannuation Scheme 5bn bid for Severn Trent Also involved Kuwait Investment Office and Borealis Infrastructure Largest direct investment by British pension fund in UK infrastructure Devon Council Pension Fund 40m in Aviva Investors Returns Enhancing and Liability Matching funds 50/50 investment in REaLM Infrastructure Fund and REaLM Ground Rents Fund Long-dated investments with inflation protection BT Pension Scheme Minority equity stake in Thames Water Shareholding in Kemble Water Holdings Limited Illiquid investment with a natural link to UK inflation Stanhope Pension Trust Large mandate with Allianz Global Investors Investing alongside Allianz and EIB Part-funded M8 motorways improvement project in Scotland via new PFI debt First investment of this kind by a UK pension fund </li> <li> 3. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Benefits of allocating to infrastructure debt higher spreads (but falling) 3 0 50 100 150 200 250 300 350 400 AssetSwapSpread BAML Corp &amp; Collateralised Liquid corporate bond spread as of 9 May 2014 = 118bps Approximate premium over liquid bonds = 75bps Approximate return on core infrastructure = 193bps Approximate return on opportunistic investments = up to c. 240bps, case by case Comparison of Pricing on Private Infrastructure Loans vs. BAML Corp &amp; Collateralised </li> <li> 4. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Benefits of allocating to infrastructure debt lower default experience 4 Default Rates on BBB-rated infrastructure debt are consistent with those experienced in A-rated corporates Furthermore, ultimate recoveries on defaulted debt average 80%, and in 65.3% of cases defaults were restructured without loss. The takeaway is lower default losses than the BBB-rating would suggest. Source: AllianzGI and Moodys </li> <li> 5. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Benefits of allocating to infrastructure debt role in a terminal portfolio 5 Corporate Bonds Direct Lending Corporate Linkers Infrastructure Debt Long Leases / Ground Rents Gilts Cash </li> <li> 6. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Challenges of allocating to infrastructure debt availability 6 Despite having dramatically improved capital ratios in the past four years, European banks are not done yet, with many ratios below their long-term target or requiring improvement because of transitional rules. As shown, the average Basel 3 Common Equity Tier 1 (CET1) Ratio* is now within 50bp of the average target, although these targets continue to go up From a creditor perspective, the continued bolstering of European bank capital is the primary positive fundamental force affecting bank fundamentals. Source: Barclays Research, European Banks Three Dimensional Capital, 25 November 2013 * The CET1 Ratio is the ratio of the most junior form of capital available to absorb losses (typically common equity and retained earnings) versus risk-weighted assets. 0% 5% 10% 15% RBS HSBC Lloyds UBS Credit Suisse DB Commerzbank BNP SocGen Credit Agricole Santander BBVA Unicredit Intesa SP Goal CET Ratio European Banks CET1 Ratios: Progress vs. Goals** ** Goal is stated company target or Barclays expectation. </li> <li> 7. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Challenges of allocating to infrastructure debt competition for assets 7 AXA's plan to invest EUR10bn over the next five years is the most significant so far from a European insurer. Other insurers that have recently announced investment plans include Ageas and CNP Assurances, which have both signed deals with Natixis to co-invest in infrastructure debt, and Allianz Global Investors who set up an infrastructure debt platform. Source: FitchRatings, 19 June 2013 The RBS Group Pension Fund has allocated an initial 750 million British pounds (US$1.2 billion) to Hastings Funds Management to manage and develop private market infrastructure assets Source: Wall Street Journal, 17 July 2012 Aviva and Legal and General are among the six insurers that have agreed to collectively invest 25bn in UK infrastructure over the next five years Source: Professional Pensions, 5 December 2013 </li> <li> 8. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Challenges of allocating to infrastructure debt political uncertainty 8 Budget 2014 widely seen as offering limited visibility of future pipeline: 140m for flood defences 200m for potholes Guarantee of 270m for Mersey bridge Up to 200m for Ebbsfleet Garden City 100m for Greater Cambridge 20m for Cathedrals </li> <li> 9. Private &amp; Confidential Investing in Infrastructure 24 June 2014 Challenges of allocating to infrastructure debt regulatory uncertainty 9 The FTSE 100 company said sales of annuities, which allow pensioners to convert retirement pot into income, had fallen by half since the chancellor unveiled the shake-up in the budget six weeks ago. Source: Financial Times, 30 April 2014 Greater Flexibility at Retirement for DC Pensioners Decrease in Demand for Annuities Decrease in Demand for Long-Dated Assets by Annuity Providers More DB Members Shift Retirement Savings to DC Schemes Liquidity Issues for DB Schemes &amp; Decreasing Demand for Long-Dated Assets Mitigating factors for infrastructure debt: Active secondary market. Many deals in</li></ul>