Real Assets
The Opportunity in Infrastructure High Yield
Article
Jun 13, 2024
We believe including an allocation to real asset high yield can provide many potential portfolio benefits. These include better credit quality, lower overall default risk and higher recovery rates than broad high yield. Within real asset high yield, we currently see a compelling opportunity in infrastructure high yield, which is attractively valued, in our view. Infrastructure high yield spreads have decoupled from broad high yield over the past 12 months, and infrastructure high yield now offers significantly more attractive yield relative to broad high yield.1
We believe dislocation within the telecommunications and cable sector has driven this difference in valuation, with telecommunications the widest-trading sector in high yield. Telecommunications is historically a high-capital-expenditure sector, and it is going through structural changes due to competitive repositioning of legacy businesses amid technological disruption, including significant build-out of fiber networks to replace copper networks. Industry players are having to adjust to this rapidly evolving environment while servicing highly levered balance sheets, as a result of aggressive debt funding of significant and ongoing capital improvement projects. Unfortunately, the increase in interest rates has made servicing the high debt loads much more difficult.
Consequently, the market is painting the sector with a broad negative brush. While we expect some telecommunications defaults among several large high-profile issuers, we believe there may be attractive relative value to be found among certain high-yield issues backed by high-quality infrastructure assets. In our view, this environment plays well to the strength of managers who have a deep bench of sector specialists across the capital structure and can identify compelling opportunities on the back of sound fundamental and valuation analysis.
Within infrastructure high yield, we believe the current valuation dislocation could persist for a while as some high-profile distressed situations take time to get worked out. Nonetheless, we believe these situations are creating longer-term attractive risk-adjusted opportunities among select issuers.
ENDNOTE
1 Source: Bloomberg.
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