Infrastructure bonds have been around for a while but they need stronger government backing if they are to gain traction. 

Five years ago, infrastructure was heralded as the next hot asset class. It was largely down to timing. Banks had cut capital-intensive long-term lending as they scrambled to comply with the incoming Basel III requirements, while stretched government budgets could not fund the roads, public transport and schools needed to support growth.

Cash-rich private investors, meanwhile, were waiting in the wings. They needed to put to work the funds they had hoarded since the financial crisis (during which many had been burned), and with interest rates low – and still falling – they were keen on long tenors that offered a yield pick-up. Infrastructure and non-banks are not a natural fit, but to investors’ credit, they adjusted. They got comfortable with construction risk, found ways to mitigate negative carry and learned to monitor projects.

Multilaterals have also done their part. Their credit enhancement programmes have boosted the rating of senior infrastructure debt to the point where it becomes palatable to investors. They are also starting to work together – rather than compete – to mobilise private funds.

The hard stuff has been done. But infrastructure is still not an established asset class, and the blame lies squarely with governments. Procurement agencies are hesitant to stray from traditional sources of funding and many politicians are paranoid that any type of new financial instrument, project bonds included, could lead to the economic chaos caused nine years ago by those dreaded subprime mortgage-backed securities.

But they need to get over these mental hurdles, and fast. As interest rates head north, the window of opportunity for infrastructure to become an asset class is starting to close. After all, who would blame investors for choosing a corporate bond with a strong yield over a greenfield, first-of-its kind bridge that ties up your cash for 20 years?

Given infrastructure is for the social good, it is somewhat counterintuitive that private investors are on board with the idea while national authorities are holding things back. Multilaterals and the buy-side need to band together to convince governments of the merits of project bonds. And they must act now – otherwise infrastructure will soon be remembered as the hot asset class that never was.

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