HICL C-Shares may offer cut-price entry

The premium on the ordinary shares is justified; HICL has achieved the best NAV returns of the six infrastructure investment trusts over one and five years, and currently has the highest yield at 5.68 per cent. During the turbulent market conditions of 2008, its share price rose more than 5 per cent even as the FTSE All Share fell more than 30 per cent.

The company is raising £180m by issuing 180m C-shares at a 100p a share, which will eventually be converted to ordinary shares, and possibly at a cheaper price than the current market price. Existing holders take priority - there's an open offer on a 'one C-Share for six ordinary shares' basis, which would account for 111m shares if fully taken up - but the balance, plus any shares not taken up under the open offer, will be placed to institutions or offered for general sale. New investors have until 22 March to apply for C-shares.

HICL is run by an experienced team of 32 at InfraRed Capital Partners, all of whom have an infrastructure background, a broad range of relevant skills, and experience in social infrastructure, transportation, telecoms and renewable energy. They sit on each PFI/PPP project company’s board taking an active role in its management.

HICL mainly invests in the following areas:

■ private finance initiative (PFI) or public private partnerships (PPP) social infrastructure projects with public sector counterparties;

■ investments with similar risk/return characteristics to PFI/PPP such as operational wind farms, solar parks and hydro schemes;

■ regulated utilities with comparable risk/reward profiles; and

■ infrastructure debt.

HICL has a diversified portfolio of 70 investments and around 88 per cent of these are operational, which means low construction risk. Revenues are often linked to inflation. However, around one third of the portfolio is exposed to health, primarily acute hospitals, and Iain Scouller, head of the funds team at broker Oriel Securities, says these can be complex and face greater political risk because of the drive to reduce in-patient admissions.

The government is also reviewing infrastructure funding and structuring, and may scrap PFI and PPP schemes in their current form. The schemes which replace them may not generate such attractive returns for the funds which invest in them. Around 87 per cent of HICL’s investments are in the UK.

But Mr Scouller says: "Even if returns on newer projects are lower than historically delivered by many of the concessions already in infrastructure investment trusts' portfolios, we think this will take a long time to feed through into the portfolios. Therefore, even if there continues to be little UK PFI new deal activity in the short term, these funds will continue to have strong cash flows for a long period to come from their existing portfolios."

Around 63 per cent of the projects in HICL's portfolio have at least 20 years to run, and more than 30 per cent have between 10 and 20 years. HICL’s search for new investments is also targeting Europe, North America and Australia as well as the UK, while its managers say there may be opportunities to acquire further PFI investments in the UK as sponsors continue to sell down their interests in projects and portfolios.

HICL has a reasonable total expense ratio (TER) of 1.47 per cent, lower than some of its infrastructure investment trust peers. With its high yield and good record of returns, HICL's C-shares look a good option both for existing and new investors. Buy.

Source: Morningstar, *InfraRed Capital Partners.

Performance data as at 6 March 2012.

TOP TEN HOLDINGS as at 31 December 2011

Sector breakdown as at 31 September 2011

Source: Oriel Securities