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Can APA Group take advantage of shifting interest rates?

Its often said that rising interest rates are likely to have a negative impact on infrastructure businesses such as Transurban Group (ASX: TCL) or Sydney Airport Holdings Pty Ltd (ASX: SYD), and often for good reason.

These types of companies provide investors with bond-like returns, which lead to a lower valuation when discounted at a higher interest rate.

While the logic holds, APA Group (ASX: APA), the energy infrastructure business has sought to clarify the real impact that interest rates have on its business due to a few nuances specific to it.

In a presentation at the Macquarie Group Ltd (ASX: MQG) conference in Sydney, the company stated that its current weighted average cost of debt of 5.6% could be lowered by refinancing bonds which have higher interest rates of up to 11% and are maturing between FY 18 and FY 21 .

Once refinanced to a lower rate, the business can then hedge against rising interest rates using swaps. The company’s presentation even implied that there could be a net benefit to the business when interest rates rise because the RBA will likely use inflation data to influence its decision to raise rates.

Rising inflation increases APA Group’s revenue which could even offset against the higher interest costs.

Foolish takeaway

I think there is merit to the company’s arguments but it wouldn’t be a significant factor for me if I was to make an investment decision on the company.

What I would look for more is the company’s long-term competitive advantage in the market and how it compares as a long-term investment relative to its peers.

While APA Group’s large network of gas transmission pipelines give it a competitive edge, my preference would be more towards AGL Energy Ltd (ASX: AGL).

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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