by Jerome a Paris
Thu Nov 30th, 2006 at 06:02:25 AM EST
I've been writing regularly about the incrzeasingly imprudent behavior of banks in recent times, which are financing, thanks to cheap liquidity, extremely aggressive transactions in supposedly boring sectors like energy and infrasturcture. Well, Standard & Poors is officially worried:
Fears for transport and utilities 'bubble'
Investment in the global infrastructure sector is inflating into a dotcom-style bubble, suffering the "dual curse" of overvaluation and excessive leverage, Standard & Poor's warned today.
The gloomy prognosis follows expansion of the sector this year, with transactions so far totalling $145bn (£74.5bn) globally - a 180 per cent increase on 2000 - and up to $150bn of funds raised and waiting to be placed, according to the rating agency.
Michael Wilkins, managing director of S&P's European infrastructure finance group, blamed a combination of cheap financing and private equity interest for pushing up asset prices and leverage amid a relative shortage of suitable targets.
"Talk to anyone in the industry and they all agree that we are getting to a stage where the whole market is overheated."
Infrastructure assets have become popular because they are commonly believed to offer stable, inflation-proof cashflows, making them a good match for pension liabilities. Their cash-generative characteristics means acquisitions can be funded with large amounts of debt.
He cautioned that private equity's three to five-year investment horizons were unsuitable for infrastructure. Buy-out firms account for 50 per cent of infrastructure deals this year.
Everybody knows it, but people keep on doing it, because others are doing it, and if you don't follow, you don't do deals and you don't get your bonus at the end of the year.
And note that this is not even investment: this is just buying and selling of existing assets, with much less actual construction activity. It's a huge financial bubble waiting to pop. The only thing is - nobody knows who will take the hit, because risk has been sliced, repackaged, resold, resliced again, hedged, and sometimes dumped onto unsuspecting investors.
Ah, but it will give a lot of work to lawyers and bankers - the bankrupcy and workouts kind... They also get nice bonuses.