Infrastructure debt can provide a valuable hedge in a changing interest rate environment, according to Angus Davidson, Head of Private Debt Real Assets, APAC, Natixis Investment Managers (Natixis IM). Davidson, based in Hong Kong, was speaking at an event dedicated to insurance companies hosted by Natixis IM in Hong Kong in April.

In the panel discussion of the event, Davidson outlined how infrastructure debt is less sensitive to interest rate variation, provides inflation protection, and offers a high degree of resilience to macro events which are particularly key for insurers who look for long-term and high-yielding stable cash flows with low underlying credit risk.

There are particular advantages of investing in APAC infrastructure debt, Davidson added, given the strong risk-return profile of Asian assets. Currency risk protection can be provided through currency swaps, while US dollar loans or a dollar peg are available in some sectors and countries.

Davidson also commented on the current roadmap of Hong Kong’s Insurance Association. The Hong Kong Risk-Based Capital roadmap will create capital requirements rules for licensed insurers, to be determined by the level of risk faced by each insurer.

Other jurisdictions, such as Korea and Japan, have already introduced favourable treatment for infrastructure debt, Davidson noted. “This is likely to happen everywhere, so it will pay dividends to get ready for it,” he said.

Pascal Leccia, Natixis IM’s Senior Investment Risk Manager, APAC, also participated in the panel and pointed to the factors that make infrastructure debt attractive to insurers. These factors included favourable credit characteristics, such as low levels of default and high recovery rates.

Leccia said appropriate risk assessment was essential for this asset class. “The diversity of the APAC region comes with complexity such as regulatory systems and maturity profiles. There are very specific risks in this asset class,” Leccia said. “It requires robust due diligence to identify the risks, and appropriate structuring and monitoring to mitigate them.”

It is not always appreciated that infrastructure debt can significantly help insurers to achieve their ESG or net zero targets, said Davidson. Natixis IM’s approach to ESG is wide-ranging, he said. Natixis IM is a UN PRI signatory, has strong internal ESG policies, and integrates ESG factors into investment decisions as a key driver of investment performance.

For insurers, investing in sustainable infrastructure dovetails with many governments’ desire for their economies to become more resilient to climate change. “In fact, this kind of investment can create a virtuous circle for insurers since climate-related projects can help to mitigate underwriting risks,” Davidson said.

However, the renewable energy boom is not without risks and investors must be highly selective on both projects and counterparties.

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