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Ultra-low rates push some investments out of reach

Infratil says ultra-low rates have actually pushed some investments out of reach

By Jonathan Underhill

Nov. 14 (BusinessDesk) - Infratil, the investment company managed by HRL Morrison & Co, says ultra-low interest rates since the global financial crisis have pushed some investments out of reach because they have driven up prices of assets with higher returns.

Infratil has historically been one of the biggest issuers of NZDX-listed debt securities but over the past decade its use of fixed-term bonds and bank debt has fallen to 19 percent of total funding as at Sept. 30 from 49 percent as at March 31, 2009 (although another 9 percent of funding comes from perpetual bonds).

The change has been driven by concerns "about the potential for unpredictable adverse changes to global credit markets to cause an increase in the cost of debt and its reduced availability," Infratil says in its interim report. "A second factor is the difficulty management has experienced finding good investments at good prices. Other investors who have been willing to invest at low yields have driven the prices of many assets out of reach."

"Cheap debt may seem like a boon (except for savers) but it creates distortions and risks," chairman Mark Tume and chief executive Marko Bogoievski say in the report.

Problems for Infratil have been the increase in investors seeking "near bond" investments. Stock prices have risen for companies offering good dividend yields, as have prices of assets offering solid rents. "This has priced Infratil out of some brownfield opportunities," Tume and Bogoievski said.

It has also driven some of those investors into more complex and difficult assets, such as power stations that carry energy price and volume risk, driving up prices and pushing down the potential returns "again squeezing Infratil out," they said.

This year Infratil has focussed on existing investments while selling its 19.91 percent stake in Metlifecare, while in 2016 it invested in US renewable energy company Longroad Energy, acquired 48 percent of Canberra Data Centres and teamed up with Australia's Commonwealth Superannuation Corp to win a 30-year concession for student accommodation from the Australian National University.

Infratil cites a Bank of England working paper published last month that the current bond bull market in US Treasuries, which originated in 1981, is the longest since a "bull run" in interest rates in Venice between 1441 and 1481. That paper said all bull runs come to an end and Infratil adds that it is "sceptical" that interest rates will stay lower for longer. As a result, it has adopted a "circumspect and cautious approach" to investment.

"If it turns out that rates do rise, especially if that rise turns out to be sharp, then our conservatism will be rewarded," the company said.

Infratil's investments amounted to $2.79 billion as at Sept. 30, down from $2.9 billion on March 31, which included the Metlifecare stake. Its biggest asset is its holding in Trustpower at $877 million followed by Canberra Data Centres (CDC) at $435 million, Wellington International Airport at about $398 million and Tilt Renewables at $329 million.

Last month Infratil, which is one of the biggest issuers of NZDX-listed debt securities, opted not to offer a reinvestment to holders of its November 2017 bonds, saying it had ample funds and untapped bank facilities. Funds on deposit stood at about $377 million on Sept. 30 and it also had $246 million of undrawn bank facilities.

"With that level of liquidity a new bond wasn’t required," said Tim Brown, who is head of capital markets, regulation and governance at Wellington-based investment bank Morrison & Co. "We do like to be able to offer bondholders a rollover as we know a lot of them like the convenience. But over the last decade, we have let issues lapse about a third of the time (and offered rollovers two-thirds of the time). It has always boiled down to actual and projected funding needs."

Infratil expects to have allocated much of its cash holdings before November 2018 and will be offering a rollover for that maturity, he said.

The company expects assets in its portfolio including Tilt Renewables, Longroad Energy, Wellington Airport, CDC and RetireAustralia may soon require additional capital for their investments, it said in the interim report.

Infratil shares last traded at $3.215 and have gained 17 percent this year.



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