We’re all in the same boat now – moving like cagey tigers in our allotted territories, wading through thousands of unnecessary emails, wrestling with yesterday’s wonder technology innovation… all the while maintaining an ostensibly-genial appearance for the nearest and dearest.
One window permanently open at the John Hopkins Coronavirus Resource Center logging progress of Covid-19 around the planet, tracking confirmed cases – 542,788 globally at the start of writing this piece (558,502 at the end) – and the rest focused on the world of infra.
Desperately hoping the next conversation will not include the phrase “unprecedented times” or round off with the well-intentioned, but jaw-clenchingly irritating “stay safe”.
It is in this wall-eyed, stir-crazy environment that we turn our focus towards the sector that will be most heftily impacted by these “challenging times” – forgot that one – and that’s Transport.
Talking to folk around the market this week, and thoughts turn to the assets whose business model is cratered by cessation of movement as we batten down hatches, pull up drawbridges and settle into periods of self-isolation for our own safety and that of others.
Primary among those concerns are demand-risk assets, the likes of airports, ports, rail, ferries and toll roads… not to mention all those delightful Core+ and Core++ assets that now have the chance to prove they actually do exhibit infrastructure resilience characteristics.
Shocked to the core
The immediate gut feel from the industry is that airports will be the first against the wall in the wake of coronavirus, while other demand-risk assets will be impacted on a sliding scale… but none to this extent.
We will likely see the airport heavyweights – the likes of Heathrow, Gatwick or Brussels – go to shareholders for a bit of cash to tide them over, but they should largely be OK… assuming we return to something closer to normality by June.
“It’s inevitable that they will need to raise additional funding,” says one source when asked about the short-term future for large airports. “Initially they’ll tap their shareholders. It’s unlikely the debt markets will be keen to help at this point, until they know what’s happening, so it’s likely to be more of a shareholder play.”
The June cut-off point most sources agree to be the tipping point. Up to that stage, most airports of scale can cope with what – if they get a summer – will be a blip. Let’s not under play that, it will most assuredly dent their returns for a couple of years, but it’s a long way from being a death blow that some insist it is.
However, should the current hiatus run on until December, that will be a very different story for airports (and demand-risk infra in general, to be fair). If coronavirus has legs to last until the end of the year, we’ll start seeing assets buckle under pressure.
“The bigger airports have freight, so they still having money coming in,” says another infra contact. “But if an airport is effectively shut, there’s zero money coming in… and that’s not a good picture.”
However, given the nature of the owners of such jewel-in-the-crown assets, it’s unlikely they will lightly go cap-in-hand for a rescue package… though we understand a few airports have already started conversations with their creditors.
One senior infra lender says: “The reality is, even if they can’t pay, what are you going to do? You’re not going to get your money back by defaulting them.”
An equity player of many years adds: “The investment view – equity and debt – remains that these are short-term shocks and that passenger volumes will return when the world settles back down.”
Curiously other sources seem to be of the view that this latest shock will impact society and that many folk who would previously have jetted off on holiday in the blink of an eye will now think twice about it. Coronavirus, according to some is the catalyst to Greta Thunberg’s dreams come true.
As for regional airports, as one senior infra source succinctly puts it: “They’re stuffed.”
Right at the beginning of the Covid-19 crisis, one commentator remarked that it will not be the number of people who are killed by the disease that will leave the greatest impact (tragic though it will be), it will be the number of bankruptcies.
To be fair, that pundit was referring more to high streets than core infrastructure, but it was a fair point and one that we will be able to tally up once someone finally has the courage to say it’s over.
And this is perhaps where we can take a closer look at Core+ and Core++… because they ain’t really infra (you can say it now).
“This is a good opportunity for infrastructure yet again to demonstrate its resilience in a downturn situation – or in a shock situation,” says another senior infra type.
“While we are thinking about amendments and waivers, we are definitely not thinking about restructurings and debt write-offs. We see this very much as a ratings downgrade situation, but not necessarily looking at liquidations or exits from transactions.”
And that is how investors in resilient, traditional infrastructure view the impacts of coronavirus.
The Core+ and Core++ world now has the chance to prove once-and-for-all whether cashflows are really contracted and whether they have the stickability of true infra to ride through this storm.
Maybe we should start running a book on which major Core++ asset will be the first to hit the buffers and then how long it will take people to point out: “Well, it wasn’t really infrastructure in the first place, was it?”