You will find that life companies like regulated infrastructure investments because of the steady and reasonably predictable cashflows which can be matched against policy liabilities. These are such because gas, power, water etc are fundamental necesssities and defensive in nature. You pay for the right to be "connected", with an additional charge based upon usage.
"I think cheap credit and mispricing of risk is one and the same issue and certainly played a massive part in where we are today. At it’s most basic, credit is priced at a base rate such as LIBOR, plus a margin that is derived based on the ‘risk’ the loan represents. This is off topic – feel free to start another thread on this."
We can discuss this until the cows come home, but agreed this is off topic.
Is this really fair? Sure, the regulated asset may have an inflation component built into the agreed pricing, but what if people don’t use it? For example, people may take a slower route to the airport or take public transport instead of paying for the use of a toll way. Then there is the issue that you don’t own a share of the asset, but a share in a company or trust that owns/administers an asset.
Agreed that this applies to infrastructure assets where usage etc is discretionary, such as a toll road.
However the bulk of BBIs assets are of a non-discretionary nature, ie DBCT, NGPL, gas and power. The pricing for these assets is set by economic regulators which recognise a pricing structure which takes account of all capital and revenue items and allows for a profit margin over the life of the asset. The issue is that a key component of the consumer price is non-discretionary and regulated by the economic regulator. In the UK electricty and gas is regulated by Ofgem, water by Ofwat.
For me, the biggest issue with any company that is highly levered right now is their ability to roll the debt. Banks have ever shrinking capital to employ in making loans (each loan they retain risk on ‘consumes’ some of their capital) so they’re being forced to delever. A declining pool of capital means banks can and are being more selective in what they finance. A highly leveraged infrastructure project with optimistic revenue forecasts may not be on top of the pile. Even if these projects can access capital, it will be relatively more costly. Ultimately, more expensive capital will impact the economies of more marginal projects.
I think that your comments do not reflect the following applicable to BBI:
a) A regulated infrastructure asset cannot be compared with an entity where shareholders take the full benefits of risk/reward. A normal company can set its own prices, whilst those of a regulated infrastructure business cannot.
b) With vital infrastructure assets the operating business itself is normally "ring fenced", ie protected. A bank cannot just take control of and shut down a necessary service such as gas in the same way it can an ordinary business, this again is an attribute of the nature of the service provided and the regulatory environment.
c) Economic regulators take account of the costs, including the cost of capital in setting pricing structures.
d) The declining pool of capital argument is applicable amongst normal companies competing for that capital. It is not valid when an infrastructure asset is subject to a regulatory environment where effectively the capital risk is ultimately effectively subject to supervision and in some cases guarantee by an economic regulator. This obviously varies depending upon the jurisdiction (ie UK, US, Australia & NZ -state and federal as applicable).
Cheers
