INVESTMENT CRITERIA

PROFILE

For qualified clients of CAXXOR® Investment in real assets can present an opportunity for investors to have a required opportunity to cover future liabilities, mainly in all the post-pandemic scenarios of 2020. Investors can provide products at very competitive prices and benefit significantly, this is because typical infrastructure loans have historically outperformed traditional investments.

In particular, the treatment of infrastructure loans under risk-based capital regulatory regimes can be

attractive in relation to more traditional institutional investments. However, we must keep in mind that, although the capital charge may not necessarily inhibit this investment, a treatment that reflects the underlying economic risk of the asset class is likely to allow investors to commit more money to the sector.

Investments in infrastructure are an interesting option for a investors portfolio, as they provide:

• Potentially lucrative risk-adjusted return on equity

• Long-term risk exposure, which can provide a good match.

for long-term liabilities

• Liquidity and diversity of the sector, which could increase the portfolio.

diversification

• An opportunity to lend money to sectors that need financing, leading to social and potentially reputational benefits.

There is currently growing interest as investors as they discover that the benefits of infrastructure assets are greater than the apparent costs relative to the low returns available on more traditional investments.

Characteristics of the projects in which CAXXOR GROUP® participates:

- Require a large initial capital outlay or have material ongoing capital expenditure needs.

- Involve long duration contracts of varying complexity

- Yield stable, predictable, long-term cash flows (up to 25 years or more) which may be inflation-linked

- Cash flows are often influenced by a regulatory regime set by a government or sponsored/subsidized by a governmental or quasi-governmental body.

STATUS

GREENFIELDS

Greenfield projects involve an asset or structure that needs to be designed and constructed, where no infrastructure or building previously existed.

BROWNFIELDS

GREENFIELDS

Brownfield projects involve an existing asset or structure that requires improvement, repair or expansion. The asset is usually partially operational

PRIMARY PHASE

SECONDARY PHASE

Primary infrastructure investments are those made at the pre-operational or construction phase, before most revenue is generated. Higher risk is associated with construction-phase projects due to completion and usage risks.

SECONDARY PHASE

Secondary infrastructure investments apply to the operational stage of a project. There is a lower risk as construction has been completed and usage levels have been established; the risk also reduces over time if the project has proven to be revenue generating.

AVAILABILITY-BASED PROJECTS

Availability-based projects are typically where the government, or some other sponsor, procures essential facilities or services in return for payments linked to availability rather than usage levels (this obligation is defined in the terms of the investment contract).

DEMAND-BASED PROJECTS

AVAILABILITY-BASED PROJECTS

Demand-based projects are where the investor bears the revenue risk of the project. These projects vary widely in risk profile; often they have inflation-linked returns with greater exposure to economic risk and tend to be long term, hence uncertain in the future.

CORPORATE ENTITIES

CONCESSION STRUCTURES

Corporate entities include utility companies, toll road operators and airport companies, whose revenues are either economic or regulated. Many infrastructure corporate entities generate revenues that are broadly linked to inflation. Corporate entities tend to be less leveraged than concession structures and debt is typically more liquid.

CONCESSION STRUCTURES

Concession structures involve debt which is typically secured on physical assets or contracts. Some concession structures also provide for index-linked cash flows, which can be financed by index-linked bonds. Included within concession structures are government initiatives, such as PPPs and PFIs

DEBT INVESTMENT

EQUITY INVESTMENT

Debt is usually secured on physical assets and/or contracts and as such the cash flows are generally stable and secure. Debt will typically make up 80%–90% of a project’s capital requirement. There are typically a number of borrower options embedded in projects which add to the operational complexity of these investments.

EQUITY INVESTMENT

Equity investors receive the remaining cash flows from projects after deducting operating costs and income used to service debt investors. Thus, equity investors have a leveraged exposure and are subject to more volatile cash flows and asset valuations. Equity will typically comprise 10%–20% of a project’s capital requirement.

RISKS

Optionality

Construction

Optionality

Under infrastructure loan contracts, the borrower retains the option to repay or extend the loans at any point. Exercise of these options has the potential to result in a loss of income to the investor.

Currency

Construction

Optionality

Projects undertaken in a foreign country are subject to the risk of movement in currency exchange rates. CAXXOR® may prefer projects that have recovery in US dollars, however we do have strategies for most currencies.

Construction

Failure to finish construction on time, according to specifications and within budget, will pose a considerable risk to the investor and possibly lead to termination of the project before the income-generating secondary phase begins.

Supply Chain

Environmental

Construction

It is important that supply chain agreements are drafted tightly and the covenant strength of both main contractor and key sub-contractors are acceptable. The caps and limitations on liability also need to be established appropriately.

Environmental

Environmental damage caused by an infrastructure project constitutes a real risk for investors, and mitigation of this risk requires extensive due diligence. CAXXOR® does not participate in projects that may have a disproportionate impact on the environment.

Regulatory

Environmental

Regulatory changes can affect infrastructure projects on a general level as well as change the direction of specific projects (particularly with projects which fall under the remit of the PFI/ PPP). CAXXOR® is an expert in mitigating these types of risks.

Operating

Higher than expected operating and maintenance costs, coupled with uncertainty over the stability of long-term returns, could lead to deductions from the monthly payments and subsequently dilute the income stream. CAXXOR® can be involved in the life of the project to control this risk.

Hand-back

Operating

The value of the infrastructure asset may be less than expected at the time of the exchange from the contractor to the project sponsor (i.e. the party providing the capital financing). CAXXOR® has developed methodologies to measure these scenarios and make decisions before getting involved in a project.

Revenue

Operating

Government debt

The risk of default with a PFI concession agreement, backed by a central government, is low. However, an investor entering an agreement which is not backed by a government guarantee is subject to the risk of being unable to meet its liabilities with the revenue generated by the asset.

Government debt

Infrastructure bonds

Government debt

The yields on infrastructure loans may be affected by movements in government debt yields. The risk of a movement relative to local swap rates driving a change in the values.

Gear Condition

Infrastructure bonds

PFI projects are often highly targeted; therefore, there are interest rate risks and downside risks to consider. CAXXOR® designs long-term structures with extensive risk mitigation.

Infrastructure bonds

There is the risk that the change in marketability of infrastructure bonds can impact the ability to trade bonds for a more marketable source or cash.

REAL ASSETS

INVESTMENT CRITERIA