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Carlyle Joins KKR in Europe Infrastructure Push: Credit Markets

From left to right, Austrian Chancellor Werner Faymann, Poland's Prime Minister Donald Tusk, German Chancellor Angela Merkel, French President Francois Holland, Lithuanian President Dalia Grybauskaite, Romanian President Traian Basescu are seen at the City Hall in Oslo prior to the Nobel Peace Prize awarding ceremony. Photographer: John MacDougall/AFP/Getty Images
From left to right, Austrian Chancellor Werner Faymann, Poland's Prime Minister Donald Tusk, German Chancellor Angela Merkel, French President Francois Holland, Lithuanian President Dalia Grybauskaite, Romanian President Traian Basescu are seen at the City Hall in Oslo prior to the Nobel Peace Prize awarding ceremony. Photographer: John MacDougall/AFP/Getty Images

Money managers from Carlyle Group LP to KKR & Co. are setting up funds that will allow their investors to take advantage of Europe’s $600 billion plan to build its way out of a recession.

Carlyle, the second-biggest private-equity firm, raised $1.38 billion last month to plow into energy projects, while KKR, run by buyout pioneers Henry Kravis and George Roberts, got more than $1 billion in June for its first infrastructure fund. BlackRock Inc., the world’s biggest fund manager with $3.67 trillion in assets, hired a team from Blackstone Group LP in November to start its first European investment advisory unit for the industry.

European Union leaders, who pledged to restore growth when they gathered in Oslo last week to accept the Nobel Peace Prize, are wrangling over a 973 billion-euro ($1.3 trillion) budget for the years leading up to 2020, almost half of which is earmarked for infrastructure. For debt investors, the projects offer higher returns at a time when interest rates are at record lows and as banks cut back their financing.

“Investors are starting to look at infrastructure lending as a mainstream asset class, and are positioning themselves to lock in some attractive returns,” said Philippe Benaroya, a managing director at BlackRock in London and one of three people the firm hired to start the unit. “They won’t take the place of the banks, but lenders’ pullback does mean there’s an opportunity for the fund managers.”

Higher Returns

KKR’s $1 billion infrastructure fund seeks annual returns of 10 to 15 percent, according to Vincent Policard, a London-based director at the firm. That compares with a 4.4 percent return this year for global government bonds and 10 percent for euro-denominated corporate notes, Bank of America Merrill Lynch index data show.

Elsewhere in credit markets, corporate bond sales from the U.S to Europe and Asia surpassed 2009’s record to reach $3.89 trillion this year. Global issuance is up from $3.29 trillion last year and $3.23 trillion in 2010, according to data compiled by Bloomberg.

With central banks holding down benchmark interest rates to prop up the global economy, investors funneled an unprecedented $455.7 billion into bond funds this year, according to EPFR Global in Cambridge, Massachusetts. Companies from the riskiest to the most creditworthy took advantage of yields that fell to 3.33 percent this month to lock in lower borrowing costs.

Default Swaps

The cost of protecting corporate debt from default in the U.S. declined for the first time in three days. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 2.4 basis points to a mid-price of 92.7 basis points as of 11:42 a.m. in New York, according to prices compiled by Bloomberg.

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.69 basis point to 12.75 basis points as of 11:42 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Edison International

Bonds of Edison International are the most actively traded dollar-denominated corporate securities by dealers today, with 48 trades of $1 million or more as of 11:43 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Edison Mission Energy, the unregulated generating unit of Edison International, filed today for bankruptcy and said it reached agreement on a reorganization plan with holders of its $3.7 billion in debt and its parent.

EU policy makers proposed the 27-nation bloc spend 460 billion euros on projects such as building roads, bridges and tunnels from 2014 to 2020 as they seek to pull the region out of its recession.

That’s almost half of the 973 billion-euro total budget discussed at a two-day meeting in Brussels last month and includes 41 billion euros to improve Europe’s transport, energy and digital networks, up from the 13 billion euros earmarked from 2007 to 2013.

European Recession

Politicians failed to agree on the amounts after richer northern European countries demanded cuts, and negotiations will continue into the New Year.

The euro-area economy is in recession for the second time in four years as trade slows and government spending declines. Gross domestic product across the 17 countries shrank 0.1 percent in the third quarter, the EU’s statistics office in Luxembourg said on Dec. 6.

The global market for public and private infrastructure investments will reach $50 trillion by 2030, according to an estimate from the Organization for Economic Cooperation and Development in Paris. Such debt investments are still new to many pension funds, with less than 1 percent of them in this market currently, the OECD said.

“Among the potential new sources of debt capital, infrastructure debt funds are the most promising,” said KKR’s Policard. “The investor community realizes now they can get better returns investing in the infrastructure projects of a country instead of buying the bonds of the country.”

Lender Pullback

The resurgence of interest by money managers follows a peak in private participation during the last decade’s credit boom, which has left projects burdened by debt now coming due for repayment.

Funds are also entering the market as banks cut lending to prepare for new rules that require them to boost their capital. Loans to projects in Europe, the Middle East and Africa fell to $38 billion this year from $82 billion in 2011 and $156 billion in 2007, according to Infrastructure Journal data. That compares with a drop in global lending to $111 billion, from $205 billion a year ago and $264 billion in 2007, the data show.

“A lot of small energy and power companies are being left at the altar by European banks,” said New York-based David Albert, the co-head of Carlyle’s energy credit investment unit.

Money managers are betting investors will favor infrastructure debt after interest-rate cuts, European Central Bank President Mario Draghi’s unlimited lending program and $2.4 trillion of bond purchases by the Federal Reserve to stimulate the U.S. economy pushed down yields on other investments.

BlackRock Focus

The Frankfurt-based ECB held borrowing costs at an all-time low of 0.75 percent on Dec. 6, while the Fed has held its benchmark rate close to zero percent for four years.

That’s caused yields on Germany’s two-year note to drop to as low as minus 0.03 percent today and rates on similar-maturity U.S. Treasuries to fall to 0.23 percent, Bloomberg data shows.

The new BlackRock team will target senior investment-grade infrastructure debt paying about 250 basis points to 300 basis points more than benchmark lending rates, said Benaroya.

Swiss Re Ltd., the world’s second-biggest reinsurer, appointed Macquarie Group Ltd. to manage a $500 million fund focusing on European infrastructure debt, it said Nov. 28.

Industry Funds Management Pty Ltd. of Australia hired David Cooper, the former head of infrastructure and structured project finance at Barclays Plc, to start a roads-to-bridges debt investment fund for Europe.

“Infrastructure debt offers an attractive, low-risk yield pickup for institutional investors, especially now that investing in quality government bonds gives you very low if any real return,” said Richard Abadie, the global head of infrastructure financing at PricewaterhouseCoopers LLP in London. “We’re seeing an increasing number of new entrants.”

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