Infrastructure ITs don't expect Carillion failure to hit dividends

HICL Infrastructure expects a £50m hit to its NAV, equivalent to 2.8p or 1.8 per cent of NAV per share of 149.6p. This is in addition to a provision of £9.4m in respect of counterparty exposure made in November.

HICL's assessment incorporates assumptions around the expected costs of the transition phase, the anticipated timing and costs of implementing long-term solutions, delays to distributions at project level, and the possible impact on the valuation of these projects.

However, this will not mean a cut in planned dividends – HICL is still targeting a dividend of 7.85p for the year ending 31 March 2018, 8.05p for the year ending 31 March 2019 and 8.25p for the year ending 31 March 2020.

Carillion provided facilities management for 10 of the projects that HICL invested in, accounting for 14 per cent of its portfolio. Carillion's liquidation triggered loan agreement defaults at most of these projects, which will be unable to make distributions while they remain in default. This situation is expected to continue until long-term replacement operators are in place, a process that HICL's board expects to take a number of months.

>HICL is still targeting a dividend of 7.85p for the year ending 31 March 2018, 8.05p for the year ending 31 March 2019 and 8.25p for the year ending 31 March 2020

Carillion was also responsible for defect risk on five completed projects where it had worked on the construction. Although technically these are in default under their loan agreements, HICL's manager, Infrared Capital, is confident that these will be resolved with lenders.

HICL invests in around 116 projects in total.The trust was trading at 147.5p and trading at a discount to NAV of 1.2 per cent at close of play on 25 January, the day before it issued the update on its NAV. By close on 29 January its shares were trading at 144.8p and at a discount to NAV of 3.1 per cent.

John Laing Infrastructure Fund's managers expect the advisory and transaction costs of appointing replacement facilities managers to be approximately £3m – 0.25 per cent of its NAV or 0.3p a share. Carillion provided facilities management for nine of the projects that John Laing Infrastructure invests in, which account for about 8.5 per cent of its portfolio.

This trust's board also doesn't expect Carillion's liquidation to affect its dividends.

John Laing Infrastructure was trading on a share price of 115.4p and discount to NAV of 1.1 per cent at close of play on 25 January. But by close on 29 January it was at a share price of 116.2p and discount to NAV of 0.7 per cent.

International Public Partnerships' board expects the cost of transferring the facilities management Carillion provided for its projects to new providers to be less than £1.5m – 0.07 per cent of NAV or 0.1p a share. Carillion provided services on projects accounting for about 3 per cent of International Public Partnerships' portfolio. The trust invests in 128 projects in total.

International Public Partnerships was trading at 147.2p and on a premium to NAV of 4.5 per cent at close of play on 25 January – just before its update on 26 January. But after dipping by close on 29 January it had improved to a share price of 148.6p and premium to NAV of 5.3 per cent.

This is in contrast to recent years when these trusts typically traded at much higher premiums to NAV, because investors liked their long-term, inflation-linked government-backed income. But at the end of 2017, PPP and core infrastructure investment trusts were trading on a relatively modest average premium of 5.3 per cent, down from 11.6 per cent a year earlier, according to Numis Securities. 

In October last year the share prices of these trusts were hit after the shadow chancellor, John McDonnell, expressed a desire to bring existing private finance initiative (PFI) contracts back in-house.

"Premium volatility has continued throughout January 2018, following the collapse of Carillion and further negative commentary surrounding PFI in the UK," comment analysts at Numis. "The perception of political risk is likely to continue to weigh on share prices across the sector, particularly for those with large exposure to the more sensitive UK PPP sub-sectors." 

But they add: "We still believe the sector offers investors exposure to high-quality inflation-linked cash flows, which are difficult to replicate. Moreover, the asset base of most businesses is conservatively valued, relative to pricing being achieved across the private infrastructure market. This should keep persistent and deep discounts to NAV at bay. Where they appear periodically, investors who have avoided the sector due to high premiums may well see current share price valuations as an opportunity to own. Indeed, we would be happy to own HICL at current levels. The extent to which political rhetoric becomes reality remains to be seen, and ultimately requires a change of government, which must be willing to risk potentially significant legal and financial ramifications." 

And analysts at Winterflood say: "Taken in isolation, the difficulties encountered by some of the listed infrastructure funds as a result of Carillion's liquidation do not justify the recent declines in share price. Counterparty exposures are diversified and contingency plans were in place for such an event, meaning that the largest impact in the sector is a relatively small 1.8 per cent hit to NAV. Despite the [other] headwinds we have decided to retain exposure to HICL within our model portfolio as we believe that it has been oversold based on the information currently available. HICL... provides well-managed infrastructure exposure, albeit heavily weighted towards PFI. We view recent diversification into regulated assets, Affinity Water, and demand‐based economically sensitive projects, such as toll roads and HS1, as positive in terms of reducing exposure to PFI, but they are also a move up the risk spectrum.

"[But] there is potential for further downward pressure if negative political sentiment towards the PFI model persists."