Where Next For Infrastructure Trusts And The 'nationalisation Debate'?

The probability of a new Prime Minister before the 2020 General Election is becoming increasingly likely as Theresa May fails to push through her Brexit deal and, as a result, forecasts for infrastructure funds with a high exposure to UK private finance initiative (PFI) projects are being downgraded to a significantly lower rating compared to those without, due to nationalisation plans from a potential Labour government.

Matthew Hose, equity research analyst, investment companies at Jefferies, said if the Party was to return to power and such plans were enacted there "would not be wholesale nationalisation of all projects, but rather targeted nationalisation towards projects that are politically contentious such as education and healthcare".

As at 1 April, trusts including the £2.8bn HICL Infrastructure trust, whose portfolio has around 40% exposure to such PFI projects, and International Public Partnerships (INPP) are trading at a premium of 1.8% and 5.3% respectively, according to Winterflood.

This compares to a premium of 18.25% for BBGI, the infrastructure fund established by Bilfinger Berger Global Infrastructure, which has virtually no exposure to the areas most at risk.

Overall, the sector derated heavily in 2017 after shadow Chancellor John McDonnell suggested PFI nationalisation, and last year the John Laing Infrastructure fund ended up the victim of a takeover bid after it traded on a high discount due to concerns of overexposure

to UK political risk, and was unable to raise equity to pay off its debt facility.

Iain Scouller, analyst at Stifel, said: "The average premium on the sector fell from 12% to 4% following [McDonnell's] comments in September 2017, and continued to de-rate following the failure of Carillion in January 2018, with the sector slipping to trade on an average discount."

It could therefore, he argued, be that HICL and INPP are at risk of a similar fate, or are at least particularly vulnerable to "knee-jerk price falls" if an election is called - especially if its outcome is uncertain.

Also in the firing line for nationalisation is the utilities sector, which these trusts increased exposure to in recent years and are therefore at further risk.

Scouller added that despite Labour's repeated calls for the nationalisation of PFI projects, the Party would need to gain a majority in the House of Commons as would the ensuing bill.

There has also been no explanation as to how the logistics of this would work and no comment on compensation for investors, which would likely be in the tens of billions range.

"Even if a socialist government did get a majority vote in a General Election, we think 'nationalisation' of PFI is easier said than done,"

he said. 

"Given many PFI projects are likely to be nearing the end of their lives by the time such a plan could be implemented, the actual impact for investors in PFI projects and infrastructure funds could be rather less than headlines suggest."

However, Hose noted that while Chancellor of the Exchequer Philip Hammond confirmed in the last Budget that there would be no more PFI contracts, there has been some growing cross-party support for a windfall tax on PFI projects. 

Hose previously gave a 20% weighting to the probability of a windfall tax being implemented (and a 30% chance for full nationalisation) if a Jeremy Corbyn-led government were to come into power.