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Q1 2020

This release updates EDHECinfra’s equity and debt indices as of Q1 2020.

  1. New indices

    1. Infra300: The infra300 equity index represents the quarterly performance of 300 unlisted infrastructure companies. The companies are selected to form a representative sample by TICCS® pillar (Business Risk, Industrial Activity, Corporate Governance) of an underlying universe of more than 5,500 firms in 25 markets. The index is equally weighted to minimise the impact of a few large firms and better represent the market accessible to the average investor. 

    2. Equity style indices: These new indices allow users of the platform to target a particular section of the unlisted infrastructure equity market by the companies' financial information and make comparative analyses such as the performance of high-cap vs low-cap or high-leverage vs low-leverage indices. It can be achieved by selecting constituents by quartile of the relevant financials. The filters include Size (Total Assets), Profits (Return on Assets before tax), Investment (Capex), and Leverage. These four dimensions correspond to the risk factors used in the asset pricing model of expected returns. Style indices can also be filtered by Project Finance or Corporate governance model.

    3. Age-based equity style indices: These indices allow filtering the broad market infrastructure universe by young (age 0 to 10 years) or mature (older than 10 years) companies.

  2. New analytics

    1. Performance contribution: contribution of index returns by TICCS pillars, i.e., industry, business model and corporate governance

    2. Factor loadings (equity only):

      1. EDHECinfra uses a multifactor model of expected returns to derive the mark-to-market discount rates of unlisted infrastructure investments. To further increase transparency and understanding of the model, this analytics has been added to demonstrate the four quartiles of the underlying factors over time, namely: Size of the company (total assets), Leverage (Senior liabilities/Assets), Profitability (Return on assets), and Investment (Capex/Assets)

    3. Credit risk metrics (debt only): standard credit risk metrics in the debt markets, i.e., probability of default, loss-given-default, and expected loss, are now available for EDHECinfra indices. 

    4. IRR/YTM quartiles: highlights the distribution of index constituents' expected return over time. With this analytics, investors will be able to make a relative assessment of the expected IRR (before fees) of an investment, at any point in time, against the broad market index or any specific sub-index.

    5. Equity Risk Premia: is the weighted average of the modeled equity risk premium of underlying constituents of the relevant index.

    6. Maximum Drawdown: shows the maximum drop from the peak to the trough since the inception of the index on a cumulative basis.

  3. Model updates

    1. Equity dividend forecasts: for the purpose of equity valuation, each company’s future debt service obligations are estimated using the projected estimates of DSCR and CFADS instead of existing outstanding debt, thus controlling for the impact of future refinancing and borrowing on project free cash flow. This impacts the valuation of infrastructure corporates, which have a valuation horizon much longer than their current debt repayment horizon.

    2. Use of market inputs in the calibration of expected returns: in line with IFRS 13 guidance on the use of market inputs in unlisted company valuations, to improve out-of-sample prediction and to capture rapid changes in risk preferences such as the spike in risk premia that occurred in February-March 2020 during the Covid-19 shutdown, new market inputs were added to the estimation of required risk premia using a limited number of TICCS®-qualifying listed infrastructure equity prices (65 firms) in the equity risk premia model. Market spreads of listed bonds issued by the companies in EDHECinfra universe are also used for the calibration of the credit spread model.

  4. Data updates

    1. The financials of 46 companies were updated in this quarter using the latest audited accounts and other contributed data.

    2. Preliminary adjustments were made to the revenue forecasts of selected infrastructure companies in line with the impact of COVID-19. A detailed note can be found here. These forecast adjustments will be revised in the upcoming quarters and also extended to other infrastructure businesses, as the full economic impact of the pandemic is observed in the markets.

    3. Previous releases include a handful of listed companies within the broad-market universe, primarily for backtesting purposes (asset pricing). From the Q1 2020 release, all index constituents are unlisted. Any listed entity has been removed from the universe from the moment it becomes public in the universe history. This results in 20 companies being removed (the full list is available below) and replaced with suitable unlisted constituents from similar countries and sectors.

  5. Calculation updates

    1. (warning) Index Freeze:

      1. From this quarter onward, EDHECinfra indices' historical results will be ‘frozen’ to ensure stability and consistency over time. The index freeze will have an 18-month (six-quarter) lag due to the fact that some of the relevant financial and price data can take up to 18 months to be revealed and integrated with the estimation of the risk premia and cash flow forecasts. During that 18-month window, all results can be considered as ‘best estimates’ of the risk and returns of the relevant index constituents.

APPENDIX

Listed Firms removed from universe

APA Group
Pacific Hydro
Envestra
Ausnet Service Network
Autoroutes Paris-Rhin Rhone (APRR) motorway
ADP Group
Bristol Water
Drax Power Station
SP Transmission
Severn Trent Water
ALERION CLEAN POWER
Auckland International Airport
Vector Limited network
Port of Tauranga
Mighty River Power
Arise AB Wind Portfolio
United Utilities Water

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