AXA – Scaling up infra debt
AXA Investment Managers - Real Assets has closed its first infrastructure debt fund just over a year after opening up to external investors. The firm is outpacing many rival institutions in building up a European portfolio. ByStefano Berra
In the increasingly crowded infrastructure-focused European institutional investor scene, AXA Investment Managers stood out as 2017 drew to an end with a flurry of debt deals.
Within a few weeks the asset manager unit of the world’s third largest insurance group reached final close on its inaugural €1.2bn infrastructure debt fund and penned debt investments in UK biomass, Italian wind and French toll roads. In the final quarter of the year alone, the investor planned to add as much as €900m to its infrastructure assets under management.
“By the end of the year we will have around €5bn of investment,” Bertrand Loubières, AXA IM’s head of infrastructure finance, told PFI at the end of November. “Typically, we invest between €1bn and €1.5bn per year. We are investing at a reasonable pace. We close on average a transaction every four or five weeks.”
Since Loubières joined the investment firm in 2015, AXA IM has expanded its infrastructure debt platform, attracting insurers and pension funds outside the AXA group. Similarly to a handful of other large European institutional investors, AXA is scaling up its infrastructure business by combining external funds with its own resources.
The AXA group provided about half of the €1.2bn raised for the first fund at final closing in October. The other half came from eight insurance companies and pension funds from France and Italy. The fund was launched in April 2016, reached a first €730m close in October 2016 and completed its capital raising within a year.
AXA IM will continue to invest AXA money through a separate mandate alongside the fund, giving the firm the ability of deploying as much as €250m in a single transaction.
“Our strategy is to make co-investments between the mandates and the debt fund, so that everyone participates in the [deals],” says Loubières. “The firepower of the mandates coupled with the firepower of the fund allows us to access bigger transactions.”
Loubières says external investors were attracted to AXA by its “tried and tested” flagship commercial real estate investment approach, which is being replicated with the infra debt business, its dedicated team of infrastructure professionals, and the broader reach of the AXA group.
“We are supported by the enormous organisation that is AXA IM Real assets,” says Loubières. “In addition to the deals team we have a strong middle-office team that is assisting us in the process of monitoring and reporting, we have a dedicated legal platform, and we have a dedicated structuring team that is looking at the structuring of all the funds and the mandates.
“We are part of a much larger real assets platform, so we can focus on what we are good at, which is sourcing, executing and monitoring transactions,” he adds.
Loubières joined AXA after almost 10 years at BNP Paribas, where he ran the project and structured bond team. Before that he worked in Morgan Stanley’s securitisation team and held other infrastructure-focused roles, building up an 18-year career in the market.
He works with two senior fund managers in his team. Elena Ascheulova joined last year after spending eight years in RBS’s structured finance team and holding other structured finance associate roles at ABN AMRO and Citigroup before that. Mayeul de Margerie was promoted at the beginning of the year and has been at AXA since 2014, after spending three years at Ernst & Young. The six-strong team is completed by three associates and analysts.
AXA started investing in infrastructure debt on its own account in 2013 with former Antin partner Charles Dupont, who moved to Schroders two years later. The firm had big plans from the start, aiming to invest €10bn within five years.
While the pace of investment has been slower than initially expected, partly due to the change in leadership, it has picked up again in parallel with the launch of the fund open to third parties.
AXA’s new German CEO Thomas Buberl has been trying to improve profitability at the asset management firm as most of its business has been hit by continuing low interest rates in Europe. In September, he was reported to have held talks with banks such as Natixis and BNP Paribas and asset manager Amundi for a possible tie-up for the asset management division to which IM belongs.
Despite the interest rates challenges, however, the IM business continues to grow. Its asset under management increased by €18bn (3%) in the first half of 2017, reaching €735bn, while revenues grew by 6% or €33m to €607m. Revenue growth was “mainly driven by higher management fees as result of higher average assets under management combined with a better product mix”, said AXA in its latest half-year report.
While still relatively small in relation to the total assets under management, the infrastructure business is providing investment opportunities with long maturities and robust structures. Loubières says infra debt will remain attractive for AXA, even considering possible rate hikes in the future.
“Interest rates going up will mean that investment strategies might need to evolve a bit and maybe a floating-rate format might become more interesting. Having said that, the pace of rate increase may be slow,” he says. “And if your strategy as an institutional investor is duration matching, you’re less susceptible to rate hikes.”
“The motivations of insurance companies to invest in infrastructure might differ from one to the other,” Loubières continues. “Some may be looking at that for liability management, some for diversification purpose, some for income. All of this will inform the kind of transactions they would do. You can’t just treat the insurance investment base as one type because it’s made up of a collection of different strategies and objectives.”
AXA’s own deals showcase a number of different investment strategies. One of its latest deals is the A19 toll road refinancing in France, a €417m 2047 private placement with a fixed rate of 2.817%. AXA was attracted to the deal by “the quality of the sponsor, the fact that it was core infrastructure”, says Loubières. “It was a transaction with a due diligence package that was well put together,” he adds.
On the other hand, the firm is also able to provide acquisition financing or refinance acquisition debt. Over the past two years it has been involved in debt deals backing the acquisition or refinancing of Swedish power network Ellevio, Danish-Swedish ferry operator HH Ferries, and German gas grid Thyssengas on medium-term tenors of 10 to 12 years.
It has also ventured into more exotic territory, financing companies with hybrid infrastructure-style characteristics well outside the classic definition of infrastructure. This year, it financed a pan-European company whose business is the securitisation of ground rent – buying the rights to receive rent for telecom towers from telecoms operators.
“It was infrastructure,” says Loubières. “It was a new way to look at the sector.”
“Our guidelines enable us to look at pretty much everything that can be deemed infrastructure, and then it is for us to perform the analysis and make sure that it is,” he explains. “We are looking for essentiality in the service that is being provided. This is really the core of the analysis. There are some things that are straightforward. For a water company it is easy. For things that are more merchant or commercial, then a careful analysis is required.”
Recent deals include several renewable power transactions. AXA is understood to have bought the €170m of 2025 2.01% amortising bonds issued by Glennmont Partners to refinance its 245MW SER wind farm portfolio – Italy’s first wind bonds. It was also one of the investors in the £250m 15-year 250bp debt deal to refinance Copenhagen Infrastructure Partners’s Brigg and Snetterton straw-fired biomass plants in the UK.
In the telecoms market, AXA took part as one of only two institutional investors in the €900m financing of the Grand Est broadband project, France’s largest high-speed internet concession.
“The idea is to have a portfolio that is representative of the market at large,” says Loubières. “We are lucky enough to be able to seek quite large transactions, so we are able to select the deals we want to do without chasing the market.”
AXA is typically looking to invest between €100m and €250m in each of its deals, going for smaller ticket sizes for riskier projects and bigger ticket sizes for core and safe projects.
“We can go below €100m but the amount of work you need to do to invest €20m or €250m is the same. We are still in the deployment phase and we want to be able to deploy capital at a sustained place,” says Loubières.
AXA is mostly investing in Western Europe, primarily in the eurozone but with some exposure to the UK and Scandinavia. The main sectors are transportation, including toll roads, airports and ports; renewable energy, including solar, biomass, onshore and offshore wind; and telecommunications. AXA is open to deals with merchant risk as long as it is mitigated in the financial structure.
The investor is building a portfolio focused on senior secured debt with an average investment-grade rating in the BBB/BBB– category. It has some small sub-investment grade assets and senior holdco financing, but no mandate for mezzanine debt. It doesn’t require public listing or external ratings. Most of its assets are fixed-rate debt, with a small portion of floating-rate deals in countries outside the eurozone, hedged back into euros.
“Every transaction has to stand on its merits; we are not adverse to a particular contractual arrangement versus another,” says Loubières. “We have investments in the form of loans, bonds, private placements. We have done US PPs, euro PPs, structured notes. The instrument is not a limiting factor.”
Private debt remains the preferred option, although public deals are acceptable and the two formats are treating largely in a similar way as public infrastructure bonds rarely trade in the secondary market.
“The choice of the route is dictated by the amount that sponsors are trying to raise,” says Loubières. “For larger transactions a public format might be more suited. For smaller deals – and you can go up to even €800m – you are able to raise debt on a private basis, including banks and institutions.”
With more institutional investors allocating money to infrastructure debt, either directly or through funds, private and public bonds are becoming the funding route of choice for many sponsors, particularly those interested in long-dated debt.
“It’s great that there are more and more institutional investors looking at the asset class,” says Loubières. “It means [the institutional market] is growing in terms of maturity as well as size. The market has evolved in the sense that the institutional investor base has proven that it is credible and reliable, and can offer a diversification in terms of funding.
“It has become clearer what the banks can and cannot offer and the same goes for institutional investors. Sponsors are better able to select the right product and structure that meets their criteria.”
While some worry that increasing competition among lenders will lead to a loosening of structures, Loubières says the market is still sufficiently robust.
“The thing I appreciate of infrastructure is that at its core it’s very credit-intensive,” he says. “We expect to see certain things in transactions, like strong security packages and strong covenant packages. Solvency II assists us in a way. It is important for our clients to have infrastructure Solvency II-compliant investments, so therefore that means our transactions have to meet these criteria. We haven’t seen covenant-lite transactions or similar things that you see in other markets. We are still looking at well-put together deals.”