Well, good morning, everyone, both those in the room and those dialing in online. My name is Hal Cullity, Vice President of Investor Relations here at HICL Infrastructure. I'd like to welcome you to the 2023 interim results for HICL Infrastructure PLC. Today, you'll be hearing from Edward Hunt, HICL Fund Manager, Helen Price, HICL CFO, as well as Ross Gurney-Read, who's a director in the fund management team. And before I pass over to them, a little bit of housekeeping. There are no fire drills scheduled this morning, so if the alarm goes off, please do listen to the friendly InfraRed fire marshals. The results presentation will go for approximately 30 minutes, and then we'll have some time for Q&A. For those dialed in, please do submit your questions online and we'll get to those as well as those in the room.
I'll now pass over to Ed to get us started with the presentation.
Thanks, Hal, and good morning. A very warm welcome to this set of interim results for HICL Infrastructure PLC. As Hal mentioned, I'm Edward Hunt. I'm the fund manager for HICL. I'm a partner at InfraRed, HICL's investment manager. I'd like to start today's presentation with a revisit of the company's fundamental proposition and key differentiators, and we've set that out on slide four. Three key elements. First, HICL's core positioning. The company offers investors exposure to the underlying essential infrastructure assets that we rely on in our daily lives. These critical inflation-linked assets are invariably at the lower end of the risk spectrum, and we offer this exposure in a highly liquid and diversified structure. Second, our active management approach. This is reflected not only in the management of individual assets, but also by enhancing the quality of HICL's portfolio through asset rotation.
This active management DNA underpins HICL's long-term track record of outperformance at 8.7% per annum since IPO, and ensures that HICL remains a core holding for investors seeking income and capital growth. Third, our established management pedigree and track record as a company and InfraRed as manager. These markets call for a steady hand, for management capability, and for robust and observable governance. These principles sit at the heart of HICL's offering and are reflected throughout this set of results today. Let's take a look at these results now on slide 5. This is a solid result for the company, reflecting the quality of HICL's portfolio, our active management approach, and set against a challenging macro backdrop. Over GBP 530 million of strategic asset rotation in the period, featuring GBP 324 million of selective divestments.
This activity has been accretive to NAV, upgrades the quality of HICL's portfolio, and provides shareholders with valuable support for HICL's NAV and valuation approach. This activity has also added further strength to HICL's balance sheet. In the middle column on the slide. Proceeds from disposals, coupled with HICL's GBP 150 million private placement, will reduce drawings on HICL's revolving credit facility by GBP 380 million to GBP 115 million as disposals complete. Fund level gearing has been successfully diversified, de-risked, and has been reduced to 10%. Tactically, we continue to exercise restraint on new investments in order to prioritize this balance sheet position. Finally, on the right-hand side of the slide, this result sees the company's weighted average discount rate increase to 8%, and that's an increase of 80 basis points in the period.
Since the onset of the high rate environment, we have increased HICL's discount rate by 140 basis points, almost entirely offset by inflation, and in that same two-year period, the NAV has still increased by GBP 0.045 per share. This discount rate of 8% is an important indicator of future expected returns from the portfolio. And of course, at yesterday's closing price, this translates to an 8.2% return after fees. Slide 6 sets out some further metrics for these interim results. Top left there, we have the 3% reduction in the NAV, reflecting higher discount rates, partially offset by higher actual and forecast inflation. Top right, an underlying return from the portfolio of 8.2% annualized. That's ahead of expectations.
The portfolio continues to perform well and is significantly insulated from the higher rate environment and the broader macro volatility. Across the bottom, the dividend. For these interims, we are reconfirming the guidance for FY 2024 and FY 2025 at GBP 0.0825 per share, and note that we expect to issue extended guidance for FY 2026 per the usual timing at the annual results in May. The increase in underlying cash cover to 1.05 x is pleasing. We do expect this upward trajectory to continue, and that remains prerequisite for the resumption of dividend growth. Helen will provide further color on the impact of inflation on our cash flows in a moment. In setting the dividend, we also remain cognizant of HICL's strategic position, and this was something that we set out to the market at the annuals.
The wasting nature of HICL's PPP assets instructs us to evolve the portfolio in order to strengthen HICL's long-term earnings base and ensure that future dividend and NAV growth can take place on a genuinely sustainable foundation of earnings. The asset rotation achieved in recent periods has enabled us to make very material and very pleasing progress on this journey.... Turning now to Slide 7, before I hand over to Helen. Inflation and discount rates is the key theme of this financial result, and I'll provide some perspectives on this now. On inflation, we have increased our long-term assumptions in the U.K., and that reflects higher market expectations, and is supported by the bidding activity that we've observed through our divestments.
The chart on the left-hand side shows our revised inflation expectations for U.K. RPI as a solid line, starting at 3.5% for FY 2025, stepping down to 3.25%, and then reducing to a long-term assumption of 2.5% from 2030. This compares to the dotted line on the chart, which shows the level that the U.K. long-term gilt market is implying for this same measure, indicating that our assumptions remain prudent. Importantly, HICL offers a real return well in excess of inflation. So on the right-hand side of the slide, if we break down the yield on a 30-year U.K. government bond, using rates at period end, it offers a real return of 1.5% in excess of inflation.
Comparing to HICL, on the second bar on the chart, HICL offers a return in excess of 6% over its portfolio-wide inflation assumption, i.e., that includes our non-U.K. jurisdictions. This spread illustrates the continued attractiveness of HICL's return versus fixed income. In line with our track record, we aim to outperform this return and to deliver capital growth alongside a strong and consistent level of income. For more now on the financial result, I will pass over to Helen.
Thank you very much, Ed. Good morning, everyone. So let's start with the NAV on Slide 9. Here, you can see the breakdown of the GBP 0.055 decrease in NAV per share to GBP 0.1594. Portfolio performance, the return on the investment portfolio, contributed GBP 0.069. Within performance, you can see the value preservation, namely the unwind of the discount rate of GBP 0.064, and value enhancements of GBP 0.005, which largely reflect the impact of actual inflation in excess of our forecast assumptions for 2023. Changes to macroeconomic assumptions led to a reduction of GBP 0.062. We increased the weighted average discount rate to 8%, a negative impact of GBP 0.0139. This was partially offset by positive adjustments to forecast inflation, totaling GBP 0.051, and interest rates.
Finally, the company incurred expenses of GBP 0.019 and paid dividends of GBP 0.041. Before I move on to the investment portfolio, here is more detail on some of our important metrics. We ended the period with net debt of GBP 497 million, as we funded our investments in Texas Nevada Transmission, Altitude Infra, and Hornsea 2. To reduce our financing risks in the absence of equity markets, we've purchased a GBP 200 million SONIA cap at 6.5% for our RCF, and we've announced or completed over GBP 320 million of disposals. At 30 September, the RCF was GBP 371 million drawn. It is expected to be around GBP 115 million, with gearing of around 10% once these disposals have completed.
Conservative balance sheet management is really important for the Board and the manager, and we are pleased to have made such good progress in both deleveraging and managing interest rate risk in such a volatile period. We will look to realize further assets to repay the balance of our RCF if equity markets remain closed, but we're clearly in no rush to do so. Finally, on the income statement side, the Ongoing Charges Ratio increased to 1.11%, as the ratio is calculated using net assets. As the disposals complete, we expect the OCR to decline back to previous levels. On Slide 10, you can see the investment portfolio, the main driver of the company's performance. Firstly, our investment process remains unchanged, and so we start on the left-hand side of the chart.
We invested in Hornsea 2 and Altitude Infra, and noting that Texas Nevada Transmission is already included in the opening balance. The disposals are made up of our portfolio sale to John Laing, Bradford Schools, and Sheffield Student Accommodation, as well as the partial disposal of Northwest Parkway. After cash distributions, the net portfolio value was GBP 3.5 billion. I'm showing this as the rebased valuation, as it's the basis for determining the portfolio return. The portfolio return is GBP 138 million, or 8.2% annualized, ahead of the 7.2% discount rate at March 2023, because of higher-than-expected inflation. The 80 basis point increase in the discount rate reduced the valuation by GBP 280 million, and as usual, I'll cover the approach to discount rates separately. Changes to economic assumptions generated GBP 157 million.
Most of this relates to changes in inflation, which Ed has already covered, and interest rate assumptions. As a reminder, our valuation assumptions are included in the appendix. Overall, the net valuation of the portfolio was flat at GBP 3.5 billion at thirtieth of September, and our commitments are now GBP 65 million. Before I talk through the usual slide on discount rates, I think it will be helpful to provide more color on transaction data on Slide 11.... As Ed mentioned, this year, HICL has announced nine asset disposals at or above carrying value, which will generate a total of GBP 324 million. This has helped to demonstrate the robustness of our net asset value.
However, given the discount of our share price to our net asset value, we think it's helpful to set out what we're seeing in the market, and provide some data on the dislocation between public and private markets for infrastructure. There are two important takeaways from the chart on the left of the slide. Activity is lower, but core infrastructure transactions are happening. Over 60 completed in Q3, as capital availability in the private space remains strong and inflation-correlated assets remain attractive. This demand for infrastructure in the secondary markets can be seen in the pricing discount for infrastructure only being 7% at 30th of June, in contrast to the average discount for listed infrastructure at the 30th of June of 21%. Now, compare this to real estate, where the average discount for secondaries was 29% and the listed sector was 31%.
So why has InfraRed been able to find buyers in this difficult market for real assets? Our relationships with private core infrastructure investors, built on our strong track record of realizing assets, have allowed HICL shareholders to benefit as these parties have been able to transact. We have sold assets to multiple counterparties, covering different sectors and geographies, totaling just under 10% of the portfolio. This gives us confidence in the quality of our portfolio, even in a difficult market. But despite this, determining valuations has not been straightforward. People's views of what is fair value are wider than normal, and we think that will settle once investors get more certainty that interest rates and inflation have peaked. On slide 12, you can see our portfolio reference discount rate is 8%.
Although we can point to our transaction activity, in the same time frame, the average 20- to 30-year U.K. bond yields have increased by 120 basis points, and rates in the rest of HICL's jurisdictions have increased between 80 and 110 basis points. Although the Equity Risk Premium does offer some protection against rising government bond yields, we want to ensure we maintain an appropriate Equity Risk Premium, which we think is around 3%. In addition, we want to reflect the jurisdiction's specific volatility. So we increased the reference rate in the U.K. by 100 basis points, and in the rest of the portfolio, between 20 and 60 basis points. So at the 30th of September, HICL's average risk-free rate is 4.7%, and the implied risk premium is 3.3.
Here, on slide 13, are the key sensitivities for our valuation assumptions, expressed in a NAV per share impact. The sensitivities are in line with those presented previously, with the discount rate and inflation being the main drivers of return. The portfolio is relatively insensitive to other economic assumptions. Let's look at inflation and then refinancing risk in more detail over the next 2 slides. I've added a new slide to help demonstrate how the portfolio is expected to benefit from its inflation correlation over the life of the fund. For HICL, higher inflation hits the NAV straight away, but cash impact builds over time, and you can see the impact of this compounding in this chart. Why does it come through like this?
Firstly, the contractual structure of the PPPs, where inflation is reset every year, usually in February, and the invoices are raised with the higher inflation from April. We're seeing the impact of inflation in our cash flows, but it's less than GBP 10 million so far. Secondly, operational considerations mean that assets may pause distributions for an extended period. For HICL, COVID delayed High Speed 1's distributions between 2020 and 2023, and the regulatory determination meant that Affinity shareholders elected not to distribute from 2018 onwards. When this happens for more than one year, the impact can be sizable, and it has to be funded from other assets. Lastly, the Board made a strategic decision to reinvest in assets with growth potential, such as Fortysouth and Texas Nevada Transmission.
These assets naturally yield less in the short term, but are fundamental to ensuring the long-term income capability of the fund. What this chart shows is that the cumulative impact of inflation is very material when it compounds. When considering the inflation impact on the portfolio, it's important to consider cash income over a longer horizon, but also the potential for NAV growth. Finally, for me, on slide 15, we have another new slide to help demonstrate how the portfolio is exposed to financing costs, and why the sensitivity shown on slide 13 is so low. Excluding holding company debt, the portfolio is 67% geared, and the Board is comfortable with this, because only 14% of the portfolio's debt needs to be refinanced at all.
Of this 14%, only 3.3% needs refinancing in the next five years, and the gearing of these assets is lower, at 49%. I'll now hand you over to Ross to take you through portfolio performance.
Thanks very much, Helen. Good morning, everyone. So before I do dive into the portfolio and how the assets are performing, it is just worth revisiting HICL's market positioning, which is set out on slide 17. We are a core infrastructure investor, that is positioned at the lower end of the infrastructure risk spectrum, and as such, all of our investments benefit from three key characteristics of core infrastructure that you see on this slide. Firstly, high cash flow quality through contracts, entrenched demand, or regulated revenues. Secondly, defensive market positioning, that's benefiting from low or no competition with high barriers to entry. And criticality, essential assets that provide the backbone to society and therefore operate with strong social license. This framework has guided us when assessing and progressing new acquisitions, and also describes the existing portfolio, which is summarized over the page on slide 18.
You'll be familiar with the two charts on this slide, which highlight the diversification that HICL Infrastructure has achieved over the years through considered portfolio construction. As Ed mentioned earlier, the recent acquisition and disposal activity has further improved diversification, and HICL's portfolio is now well-balanced across geographies, sectors, and revenue types. You can see from the right-hand chart that concentration risk is well mitigated. HICL's largest asset is less than 8% by value, with the top 10 assets representing less than half of the total portfolio value. PPPs make up the vast majority of the rest of the portfolio, as well as four of the top 10. These assets perform well in the period, benefiting from availability-based revenues, which are often inflation-linked, and contracted costs, including long-term fixed rate debt. I'll now step through the performance of the six largest assets individually, starting with Affinity Water on Slide 19.
So just under 8% of the total portfolio by value, Affinity is HICL's largest investment. As a water-only company, Affinity is not responsible for sewerage services. Its only role is to supply clean water to around 4 million households in the southeast of England. From an operational perspective, performance over the first half of this financial year has been good, with the company continuing to improve in several areas, most notably leakage, as set out on the slide. Over the last 12 months, InfraRed has worked closely with HICL's co-shareholders and the Affinity Board to oversee an evolution of the senior management team, including the appointment of CEO Keith Haslett in late 2022. Keith's team is delivering a continued improvement in operational performance, as reflected in Ofwat's latest report on the sector.
Affinity submitted its PR24 business plan to Ofwat in late September, with a draft determination due in the summer of next year. The capital investment set out in the plan would increase Affinity's RCV by over 30% in real terms, and HICL may consider funding some of this with equity during AMP8, which would be contingent on a fair final determination and the resumption of equity distributions. More broadly, we believe that the company is well-placed for PR24. It's performing well operationally, has no exposure to sewage, and has a resilient capital structure with no refinancing required until the next regulatory period. On Slide 20, we provide some detail on the three largest demand-based assets, which together are 15% of the portfolio by value.
As a whole, I'm pleased to say that the demand-based asset segment performed well, but I'll briefly cover each asset in turn. So starting with the A63, light vehicle traffic continues to grow strongly, with leisure demand resulting in over 5% more cars using the road during the peak season this year than in 2022. This would have resulted in revenues slightly ahead of our expectations, were it not for an accident which prevented toll collection for three weeks in August. However, we do expect to recover both the cost of the damage and the lost revenue through insurance, and the solid underlying performance of the asset is backed up by October traffic being just over 1% above our valuation assumption on a blended basis.
Moving on to Northwest Parkway, traffic also continues to grow strongly here in absolute terms, and is now less than 10% below pre-COVID levels. The rapid increase in passengers using Denver International Airport, which is served by the Parkway and contributes approximately 30% of its total traffic volume, has supported the strong operational performance in the first half of this year. Revenues were slightly ahead of HICL's forecast, and traffic is on track to return to pre-COVID levels by 2025. Finally, turning to High Speed 1, the domestic services continue to be booked at around three-quarters of their pre-COVID levels, despite steady growth in passenger volumes. We do expect this situation to continue for several years, noting that the financial impact is almost entirely mitigated by the contractual revenue underpin provided by the DfT.
On the other hand, international train path bookings were once again slightly ahead of our valuation assumption, and as a result, HS1 resumed shareholder distributions during the period, which was around six months earlier than we were expecting. Although border congestion does continue to constrain services, Eurostar has worked closely with HS1 to increase its timetable over the summer, as demonstrated by the fact that services were at 95% of pre-COVID levels in some weeks. In a further vote of confidence, Eurostar has returned to booking almost all of its paths in advance, with the equivalent of 91% of pre-COVID levels already contracted for the first half of 2024.... In this context, it's encouraging to see several parties publicly expressing appetite to run international services on HS1, which we believe demonstrates the inherent strategic appeal of the U.K.'s only high-speed rail link to the continent.
So on slide 21, we cover the third and fourth largest assets in the portfolio, which were both acquired relatively recently. I'm happy to say that both assets are bedding in really well to the portfolio, and complement HICL's diversification. So at Fortysouth, this is New Zealand's largest independent tower company. InfraRed has been working closely with its partners to build out the business. During the period, the company reached its steady-state staffing level of around 30 full-time employees. Operational performance since acquisition has been in line with our expectations, with revenues underpinned by the availability-based, inflation-linked anchor tenancy contract with One NZ. The management team has also successfully accelerated Fortysouth's tower upgrade program to help meet New Zealand's 5G rollout targets, and is on track to deliver nearly 300 new towers over the next four years, as contractually agreed with One NZ.
The September valuation reflects the management team's business plan and is slightly above the original acquisition price. Moving on to TNT, both Cross Texas Transmission and One Nevada Transmission continued to perform very well operationally, as demonstrated by the availability over the period, which you can see here on the slide. The impact of higher actual and forecast U.S. interest rates has been reflected in the September 2023 valuation. The company's next refinancing event is expected to occur in 2024, but the Texan regulatory mechanism enables a full pass-through of the asset-level debt costs. In the longer term, CTT also remains well-placed to capture growth from the rollout of renewable energy generation ahead of our long-term business plan assumption.
These two investments were a key part of the company's investment activity over the last 18 months, and in the next section, we have a summary of all the acquisitions and disposals that HICL has made since April 2022, and you can find that over on slide 23. So I won't dwell too long here, but you can see that we've been quite busy. And hopefully, this brings to life the portfolio rotation that Ed was talking about at the start of the presentation. There are 15 different assets on this page, of which 10 have moved in or out of the portfolio over the last 6 months. In the appendix on page 42, we have the usual detailed table setting out the transaction activity in the period, including the key dates, and the size of the assets.
But what you can clearly see from this page is that the recent activity, i.e., over the last 6 months, has been heavily weighted towards disposals, comprising 9 assets worth over GBP 320 million. And as such, I'd just like to spend a couple of minutes going into our approach to disposals in a bit more detail, which you can find over the page on slide 24. So while we have been busy, you can see from the top of the page that InfraRed has a long and successful track record of making selective disposals for HICL, dating back to 2012. In fact, if you include the recent activity, the company has divested over GBP 800 million worth of assets since IPO, with the proceeds generally being rotated into high-quality core infrastructure investments, which have improved diversification and key portfolio metrics.
This disposal activity has also directly benefited HICL's long-term shareholders, with over GBP 0.075 pence of NAV outperformance since IPO as a result of disposing assets above carrying value. In this context, InfraRed has a well-established methodology for identifying and executing disposal candidates, which was used to good effect over the last six months. This starts with a dispassionate review of the entire portfolio, based on each asset's contribution to four key metrics: return, yield, asset life, and inflation correlation. By plotting each of these variables against the portfolio average, we're able to create a heat map setting out which assets aren't pulling their weight. From this shortlist, we then take into account whether any of the selected assets have characteristics or contractual provisions we're less keen on, and by following this methodology, we're consistently able to generate value for shareholders and improve the composition of the portfolio.
Disposals are also an important source of funding for HICL, particularly at a time when capital markets are less accessible. On that note, I'll hand back over to Ed, who will explain how we approach capital allocation and also touch on the outlook going forward.
Thanks, Ross. So I'm on slide 25 now. And clearly, capital allocation is on investors' minds, recognizing the discounts that we're seeing across the sector. The Board and InfraRed remain clear about the company's priorities in the current market. HICL has a long track record of asset recycling, as you've just heard from Ross. In this market, the Board and manager have elected to accelerate this activity, which, among other considerations, has resulted in significant free cash. The company has applied this to reduce its revolving credit facility, firm in the view that the most prudent capital allocation decision from a risk and return perspective is the reduction of short-term floating rate debt. Going forward, the Board and manager intend to further reduce the revolving credit facility over time, and we continue to have some live disposal activity ongoing at the moment.
In terms of other uses of capital, it's recognized that the bar for new investments is very high, and that's set by the cost of debt and the relative return and risk offered by repurchasing shares. The company has a buyback policy, the application of which is discussed regularly with the Board, duly considering prevailing market conditions, and that the company remains drawn on its revolving credit facility. We do expect the current market volatility to offer up attractive investment situations, and InfraRed and the Board will continue to evaluate these as and when, and exercising a high level of investment discipline. This next slide, on slide 26, teases out this tactical positioning against the strategic backdrop. In the near term, set out on the top half of the slide, volatility will undoubtedly continue.
Cautiously, we are seeing the beginnings of some macroeconomic stability, but geopolitical conditions, conflict, and elections in the U.K. and the U.S. are likely to add to the various uncertainties that markets have to grapple with over the next 6-12 months. HICL's portfolio is robust and well-insulated from the macro volatility, and we've taken steps to ensure that that's the case. Strategically, across the bottom half of the slide, the prospects for infrastructure investment remain very encouraging. Underlying infrastructure demand continues to be driven by the powerful mega trends of decarbonization, digitalization, and demographic change. Governments facing these infrastructure demands recognize that public balance sheets cannot deliver this, and acknowledge that competition exists to attract the capital and capability that can, the private sector. The combination of these forces coming together creates a very attractive long-term backdrop for infrastructure investment.
It's right for the company to focus on and adapt to the conditions that are right in front of us, but we should also remain mindful of the very significant strategic opportunity that awaits the company on the other side. Finally, some concluding remarks on slide 28. The period has been a fruitful one for the company. We've seen over GBP 530 million of strategic asset rotation, including GBP 320 million of accretive disposals. This activity has improved portfolio quality, it's validated the NAV, and has played a role in further strengthening HICL's balance sheet. Underlying portfolio performance remains solid. Asset performance is well insulated from the macro environment. Assets continue to perform in line with expectations. We've materially increased the discount rate to 8%, with a significant offset provided by inflation.
The 8% discount rate is an important indicator of future returns, and of course, on the current share price, this remains higher still. As we move forward, we are positioned for more short-term volatility ahead, but ready to capitalize on the very attractive strategic outlook for core infrastructure investment. That concludes the formal presentation this morning. Very happy now to turn it over to Q&A, and I think we're going to start with those in the room.
Hi, good morning, it's Iain Scoullar from Stifel. I've got three, if I may. Firstly, just on, on discount rates. In terms of U.K. gilt yields or, or Treasury yields, to what level do you think, they would need to fall back before we were likely to see discount rates start moving down in portfolio valuations across the sector? The second one, just on sales and commitments. Are there any outstanding commitments at the moment? And in terms of... You did mention sort of the possibility of further sales. Are these likely to be smaller sales, such as some of the recent ones, or, or larger sales? And then the third one is on lockups. Can you give us an update on that? I think you said HS1 has maybe now come off lockup.
Yeah. Do you want to do the first two?
I will do my best. Apologies, I have a cold, which is why I've been coughing as I rush through the presentation, and I'll do my best to answer this. I might need Ed to help me with some of it. In terms of the rates, so they've clearly fallen back since we cut the numbers at the 30th of September. The risk premium is currently 3.6%, if you were to cut the data as at last night. I think we have to see an extended period of rates settling down before we can look to reduce the discount rate.
There's clearly still a discrepancy or probably a widening of what people view fair value at the moment, and until that narrows down, and the bid-ask spread comes in, I think that will also influence views on discount rates. We say that we think the adequate or appropriate level of Equity Risk Premium is around 3%. That's generally been the floor when we've set the discount rates over the last 18 months or so. We've clearly had implied Equity Risk Premiums of sort of 5% or so, in the sort of interest rate environment beforehand. So hopefully, that gives you a sort of a corridor. In terms of the size of sales, you're correct, we've announced 2 small ones, and the portfolio sale to John Laing at just around GBP 200 million.
The ones that we have in the pipeline at the moment are at the larger end of disposals, but they're still smaller than the one that we announced the portfolio to John Laing. So hopefully that helps answer that one. And then in lockup, the only significant asset that's in lockup at the moment is Affinity Water, although technically not in lockup, it's more that the shareholders have elected not to distribute.
Thank you.
It's Alex Wheeler from RBC. Three from me, please. Just firstly, on reinvestment in portfolio companies, Ross mentioned Affinity, which is unsurprising given the CapEx super cycle in water that we're going into. I just wondered if there was anything else within the portfolio where you see, you know, a need or an opportunity to reinvest, going forward. Second question is just on the discount in private markets. I'd be interested to get your view on whether you still see dry powder within the market on the private side at the moment. Appreciate it's a little bit less of a concern to you guys, given you've already done a lot of disposals in the interim. And then the last one is just on distributions from Affinity in 2025.
Is that based on an assumption around where the return will land with Ofwat for PR24? And if so, I'd be interested to know what sort of number you'd be looking for there.
Sure. Maybe I can take the first two, Ross, and then you can comment on Affinity. So in terms of the opportunity presented by follow-on investments through company assets, there is that potential. Clearly, we've acquired some growth assets in recent periods. When we acquired those, we were quite clear to highlight that the forecast growth in those is fully funded, so we expect that the equity distributions will partly fund some of the growth that we're expecting from the likes of Fortysouth, Altitude Infra, and Texas Nevada Transmission. Now, that said, if there's the opportunity to accelerate that growth, and that requires further funding, be it through debt or equity, we'll certainly consider that, and we'll consider that on its merits as a standalone investment, as well as the strategic opportunity it might give that business.
So we definitely see that as the potential for opportunity in that respect, but noting that the base case is a fully funded one. In respect of dry powder, it is an interesting dynamic. Despite the fact that fundraising in private markets has slowed down through this period of macro volatility, clearly, and GPs have been spending less on new investments in private markets, and the amount of dry powder that's hanging over the sector has actually increased. So if we look back over the last twelve months, I think it's sitting at around GBP 132 billion of dry powder overhang, and that's up by sort of, yeah, around GBP 5 billion from where it was a year ago.
So that feature of having this structural overhang of dry powder of money that's ready to go into the market still exists, and that will be a important factor in asset valuations and the demand for new investment. Ross, Affinity?
Yeah. So, you're right to say, Alex, that we do expect Affinity to resume distributions in the second half of calendar year 2025. So for HICL, that's its financial year, 2026. In terms of the assumptions that go into that, it's really based on the business plan that was submitted by Affinity to Ofwat at the end of September. So Affinity, in that business plan, took the view of the WACC that Ofwat published at the back end of last year. Clearly, that was based on the numbers from early September, and Ofwat themselves said that actually, that could be liable to change quite significantly based on macro conditions, and indeed, we have seen the macro picture shift quite substantially. Worth saying, that's also the WACC that we're using in the valuation for the asset.
So, we do believe that if the current macro climate continues, there could be some potential for that to be a bit higher. And then on the capital structure perspective, as I mentioned, there's no need for refinancing before the next regulatory period, and the assumption that distributions resume is based on the closing AMP7 gearing level continuing into AMP8, which would ensure that the ratios for the business, which is really Ofwat's new distribution test, are well above where they need to be.
Thank you.
Hi, thank you very much. It's Nicolas Vaysselier for BNP Paribas Exane. Just one question for me. You mentioned the higher bar for acquisition, so with regards to cost of debt and opportunities for buybacks. But I wanted to know if, as well, your criteria have changed. Like, for instance, if your IR levels, your targeting, has changed significantly versus, let's say, 24 months ago, and if yes, what is kind of the range you're looking at, or any other relevant parameter you're looking at? And just on the buybacks, could you just clarify, could you still do buybacks even if the RCF is not completely repaid? Thank you very much.
Sure. So I can take those. So in respect of the high bar for new investments, we flagged that, clearly a new investment would need to have a return that exceeded cost of debt, as well as the implied return from repurchasing the company's shares. So they remain valid considerations. Clearly, there's also a risk element in that when you're buying your portfolio, you know and understand the assets very well. And so it needs to be taken in the round in terms of what a new or investment might offer from both a risk and return perspective.
In terms of the IRR range that we're targeting, with the increase in the discount rate that we have put through the portfolio, up to 8%, that gives you an indication of where, on average, the portfolio sits, so we'll look at new investments relative to that, and that is our best assessment of where assets are pricing, and obviously we go through a process with an independent valuer and the auditor and the Board in order to arrive at those numbers. So we, yes, expectations in terms of required returns have shifted, but at the moment, the high watermark, if you like, would be, or the high threshold at the moment would be, the return offered by buybacks.
Clearly, the situation is dynamic, and as to your question regarding the use of debt for buybacks, we'd need to take into consideration where we feel we are in the macroeconomic cycle with respect to interest rates. In a period where there was quite a lot of risk that interest rates would go higher, clearly there was more of an onus on us to reduce short-term floating rate debt. Now, if you get greater comfort around that, then maybe you're prepared to borrow in order to make investments, including buybacks. But that's an ongoing discussion and remains a live process that InfraRed is undergoing with the Board, and clearly it's one that we revisit very regularly.
Also, the economic proposition offered by buybacks has also shifted in that environment as well, having come in substantially over the last two weeks. So it's something that we revisit regularly, and we just consider all of the available information that we have at that time as to respect to the very best capital allocation. And obviously, the Board is very involved in that and very much driving that process.
Hi, thank you very much for the presentation. I have a few questions on the disposal. Could you maybe provide us a bit more information around the buyers of these disposed assets? Just like general profile, I guess, excluding John Laing. And then the second question, following various disposals that are complete, are these headwinds or tailwinds to the dividend cover? And then, I guess a third on that will be what about considering the new investment activities, are they—how do they impact dividend cover? Thank you.
So in terms of the parties, there's a limit to what we can say in terms of the commercial arrangements. You've seen that the lion's share of the GBP 324 million, GBP 204 million was John Laing. So, you know, you know, high-quality infrastructure investor with, you know, institutional capital. The other acquirers, yeah, I can say it's it's institutional capital out of Europe. I can reassure that they are in no way related to InfraRed, so it's not a related party transaction. It's very much third party, but can't provide more information than that on the acquirers. In respect of dividend cover and how those disposals impact it, so as Ross set out, we do look at a number of metrics.
So four key metrics: return, yield, inflation correlation, and asset life. So we will look at those, but we're very mindful of yield at the moment and the process that we're on in rebuilding cash cover. So the overall combination of the disposals and acquisitions over this period has been positive to yield.
So we've got no more questions from the room. We'll go to a couple of the questions online. Apologies if we can't get to all of them now, but we will get back to all of them after the meeting finishes. So first, first question from Colette Ord at Numis. She notes, I note the reference that you may put more money into Affinity if the regulator gives a fair deal in AMP8, including allowing resumption of dividends. Can you give a sense of how big this investment might be?
Yes, certainly can. So, as set out in the business plan submission, the company's base case is GBP 150 million at 100% level. So were HICL to pro rata fund its share of that, that would be around GBP 50 million HICL share.
The timing of that, Ross?
Yeah, that's a good point, Ed. So the timing would be during the earlier part of AMP8. So the decision and the timing of the investment wouldn't be for a couple of years, and clearly, that would be based on seeing what the final determination looked like. And then obviously having the discussion with Ofwat and making the decision with the HICL Board, and amongst the investment manager when we have all the information.
One for Helen here on the valuation from Thomas Pocock at Peel Hunt. Given the recent inflation prints in the U.K., do the short-term inflation assumptions now look stretched with vulnerability on the downside?
No, we don't think so. We still think we've got sufficient headroom both for our assumptions for 2024 and 2025, both based on the prints a fortnight ago, together with the latest view of consensus.
Okay. Another one from Colette at Numis. Can you remind us which PPP projects you have coming to the end of life? What is the value of these over the next five years, and what proportion is U.K. acute health, please?
Ooh, there's some stats that we might need to go back to Colette on. I think in the annuals, we provided a figure, which was roughly 14 assets, coming to the end of their life over the next-
Ten years.
-10 years. So, they're all PPPs, mostly in the U.K. I couldn't give you the exact amount of health exposure within that, so, we'll come back to Colette on that one.
Thanks. Now a question that's come in from a couple of people, Shayan Ratnasingam and Thomas Pocock. What is the cost of the SONIA interest rate cap that was purchased?
The cost was very small in the grand scheme of things, so it cost us less than GBP 2 million in total.
Another one from Gravis Capital. Can you quantify the locked up distributions from Affinity and other assets? What is the mechanism for paying these distributions once available? Will it be paid in a lump sum or distributed gradually over a period?
Very happy to state that. So I think, in the case of Affinity Water, it's not the case that effectively, distributions are sat there rolling up within the business. As we've explained, these distributions, or what would have been distributions, are effectively being used to reinvest into the capital growth of the business. So what you won't see and what we're not assuming in our cash flow forecast is, come 2026, HICL's financial year 2026, a big lump of cash coming out in one go. And clearly, what we assume in the regulatory determination is a phased return to distribution. So that's what we have in the cash flow forecast. We presented the cash flow forecast graph at March, and that hasn't materially changed.
In general, you don't see kind of a big, locked up lump of cash coming out. I think as Ed mentioned in response to an earlier question, that's really the only material project that isn't distributing at the moment. Otherwise, all the cash is coming out broadly as we'd expect.
Another question from Thomas Pocock. There appears to be a disconnect between the sales achieved at uplifts to carrying value, but increases taken to discount rates based on transactional evidence. Were there any attempted disposals which didn't proceed, where pricings couldn't be agreed at or above carrying value? Maybe one for Ed to kick off.
Maybe on... Yeah, on the second part, no, there hasn't been any failed processes in that respect, so, we're not balancing transactions that didn't get away with transactions that did get away, that have been successful. But yes, there is this tension between what we're observing in transaction data versus the top-down approach, if you like, versus the bottom-up approach, looking at government bond yields. And we've had to reconcile that in this valuation. Helen?
Exactly. And as I mentioned, in my presentation, we balanced both the transaction data together with the movement, in government bond yields, both in the U.K., but also in the other jurisdictions. And we also balanced how we believe investors are looking at these assets, which is to look at discount rates and inflation together, which is why we've got the increase, in discount rates, but we then also have, the increases that we've made to inflation.
A question for Ross from Joe Wilson at Brown Shipley. What is the impact, if any, of the HS2 cancellation?
Yeah, it's a good question, given our ownership of HS1, but actually, there is no impact. Those two projects don't have any kind of contractual link. The name is the only link that they really do have. Clearly, HS1 remains the only U.K. high-speed rail line at the moment, and that remains our focus.
Thank you. Question from Peter Hill-King at Buck Consultants. How would the portfolio fare in a disinflationary period? Maybe one for Helen to start off.
We set out our sensitivities to inflation and discount rates within the presentation, so you can see that on slide 13, and that gives you a sense of the impact of inflation on the NAV per share. And we would expect, similar to the experience that we've had with higher interest rates and higher inflation, we would also expect to see benefits coming through in discount rates. So we think overall, the portfolio is well positioned to manage.
Maybe just time for one final question f++rom Colette Ord. On the disposals process, does HICL affect the sales in-house or via third-party agents? And can you give some color on the process? Maybe one for Ross to kick off.
Yeah, very happy to do that. So no, this is something that Helen touched on, actually, and it's one of the benefits of having a specialist origination execution team that is across country, across asset. And effectively, each time that we launch one of these processes, as I mentioned, it starts with this kind of dispassionate portfolio review that's done within InfraRed. And then it is the InfraRed execution team that actually goes and deals with the party that we're selling to and basically executes the transaction. So it is done in-house.
Perfect. That's all the time we have, but, thank you for those that have put questions in online. We will get back to any of those we haven't answered, via email this afternoon. I think that concludes the presentation. Thank you all for coming, and have an excellent rest of the day.
Thank you.
Thank you.