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Infrastructure - February 13, 2015

Unlisted Infrastructure Debt Valuation and Performance Measurement

In a new paper entitled “Unlisted Infrastructure Debt Valuation and Performance Measurement”, drawn from the Natixis research chair at EDHEC-Risk Institute on the “Investment and Governance Characteristics of Infrastructure Debt Instruments,” we propose the first academically robust, yet operationally implementable valuation and risk measurement framework for illiquid 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. Taking these characteristics into account is instrumental to capturing the expected performance of infrastructure debt.

Using advanced credit risk modelling and debt valuation techniques, our paper focuses on delivering those performance measures that are the most relevant to investors at the strategic asset allocation level, and to prudential regulators for the calibration of risk weightings. It also defines parsimonious data input requirements. Hence, we can realistically expect to deliver these performance measures at a minimal data collection cost.

Using well-documented parameter estimates, we show 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 high. The paper also highlights the existence of a trade-off between credit risk and duration risk which is unique to infrastructure debt.

This paper is one of the stepping stones of the "roadmap" established by EDHEC-Risk Institute towards the creation of adequate performance measurement tools for long-term investors in infrastructure.

This research was produced as part of the "Investment and Governance Characteristics of Infrastructure Debt Instruments" research chair at EDHEC-Risk Institute, in partnership with Natixis.