3.4 Price Data

The market value of the instruments included in the index are computed using a discounted cash flow (or income) methodology, using individual security information to forecast debt repayments, and a factor model of expected returns calibrated to reflect the latest market price of risk to determine the appropriate discount rate. More details are available below and in the supporting documentation.

Market term structure data

Interest rate data: Datastream®

Expected inflation data: Bank of England (derived from RPI-linked gilts)

Interest rate and RPI data for each available horizon are interpolated using a standard methodology (see Asset Pricing Methodology) to derive a term structure of risk-free/ inflation rates on each relevant future valuation date.

Cash flow data

Scientific Infra & Private Assets has created the largest database of infrastructure investment data in the world, tracking hundreds of firms over the past 20 years.

For each debt instrument issued by an infrastructure company in the Scientific Infra universe, the following information is recorded on each reporting date: outstanding face value, the currency of the instrument, interest rate (if fixed), credit spread (if floating), benchmark rate (if floating), amortisation profile and maturity date. These instruments are collected along with other characteristics of the borrower and are categorised according to the TICCS® classification.

This data is then used to forecast the debt service of RPI-linked debt instruments in nominal terms (adjusted for future inflation to maturity), as described in the Appendix.

Spread data and mark-to-market modelling

Prices are computed by discounting the expected cash flows to maturity of each instrument on each pricing date, using a term structure of discount factors built with

1. the term structure of risk-free rates to maturity; and

2. an instrument-specific, mark-to-market credit spread.

The mark-to-market credit spread of each instrument, on each valuation date, is estimated from the decomposition of observable private infrastructure debt market spreads (mostly at origination) in terms of ‘priced risk factors’ i.e. factors that predict spreads well statistically. These factors include the instrument size, maturity (duration), TICCS® sector and business model control variables etc.

Once priced factors and their associated risk premia (e.g. the impact of size or maturity on spreads) have been documented over time, each risk premia can be used to derive a mark-to-market credit spread for any instrument given its characteristics i.e. given its size, maturity, TICCS® classification, etc at the time of valuation.

The prices of all infrastructure debt instruments obtained using this approach are in 'nominal' terms, as it is obtained using adjusted (or ‘nominal’) cash flows and spreads. This is a prerequisite in order to produce index-level analytics such as yield-to-maturity which require combining all the debt instruments together.