INFLATION AND INTEREST RATES 'BIGGEST CHALLENGE' FOR INFRASTRUCTURE LENDERS

Rising inflation and interest rates are the biggest challenge for the European infrastructure lending market's ongoing growth, new research* from Nordic Trustee, and Ocorian company, the leading capital markets services provider, shows.

Its study found nearly one in three (31%) infrastructure and private credit fund managers, investment bankers working in private credit and senior executives at infrastructure providers highlight worries about the impact of inflation and high interest rates on hurdle rates.

The research across the UK, Germany, Switzerland, France, Italy and Sweden found 25% of respondents highlight spread compression as the biggest challenge for the sector way ahead of other potential challenges including limited deal flow, covenant erosion and government policy changes. Just 6% point to potential cost overruns on projects as a major challenge for infrastructure lenders.

However, when asked to rank risks to infrastructure projects across Europe, the survey pointed to regulatory and political risks along with market risks, such as demand for lending and pricing volatility as the biggest risks.

Geopolitical risks, project specific risks and the potential for the use of the infrastructure project to fail to meet expectations ranked lower but still ahead of financial risks such as leverage and repayment.

The concern about regulatory and political risks helps point to the most important ways to address those concerns with fund managers, investment bankers and infrastructure firms prioritising legal protections, the use of insurance and hedging as well as government guarantees or backing.

The research found fund managers, investment bankers and infrastructure providers are united in agreement that lenders and investors in the market now increasingly favour lower-risk brownfield sites which offer more stability over greenfield projects.

Cato Holmsen, Global Head of Ocorian Capital Markets and CEO at Nordic Trustee, said: "Market volatility is impacting infrastructure lending pricing both because benchmark yields have risen and because spreads for riskier offerings have widened. If inflation remains embedded and growth slows, that balance is likely to shift even more decisively toward lenders over the coming months.

"At the same time risk focus has shifted outward. Regulatory, political, and market risks now rank above traditional project risks. Traditional construction and forecasting risks still matter, but lenders are now more concerned about external forces they cannot control."

With more than 3,000 European trustee and loan agency mandates, Ocorian offers a wide range of capital markets services including standalone debt, securitisations, listings and loan administration across key global jurisdictions.

It works in partnership with a diverse range of clients providing SPV and corporate services as well as trustee and agency through Nordic Trustee, an Ocorian company and leading provider of loan agency and bond trustee services.

Its global capital markets teams have collectively more than 50 years' experience navigating complex structures across a broad range of sectors and asset classes including private debt, project finance, aviation real estate and shipping.