Since The Asset launched the Triple A Infrastructure Awards sometime in 2015, we have focused on the latest trends and developments in the infrastructure space in Asia-Pacific, selecting the best deals and performers across region.
Throughout our survey of activities in the infrastructure space, we have always been cognizant of the deep linkages between industry players across the world. For this year, The Asset Triple A Infrastructure Awards are going global as we cover the most significant deals defining the infrastructure sector.
Globally, the transition towards cleaner forms of energy was one of the key themes for bank lenders in 2020, whether it involved liquefied natural gas, onshore and offshore wind, or solar power.
In Asia-Pacific, “what came out clearly in the midst of Covid-19 was the resilience of the infrastructure sector”, an industry participant told the board of editors at The Asset during the evaluation process for the awards. “Infrastructure assets provide essential services, while most cash flows are regulated or underpinned by availability-based government payments. Revenues are supported by take or pay commitments from the state-owned enterprises (SOEs), many of which are rated investment-grade.”
Mirroring the global trends, the renewable energy sector once again resonated during the review period with the spotlight radiating in Vietnam.
Bucking the liquidity crunch in the wake of the market disruption, renewable energy projects were achieving financial close even at the height of the pandemic between March and June 2020 as sponsors and lenders remained optimistic on the prospects of this asset class. Indeed, this theme resonates further as it dominates the winning deals in various countries in The Triple A Infrastructure Awards.
“Capital remains readily available for renewable energy projects even at the peak of the market disruption in 2020,” one senior project finance banker points out. “That was in recognition that even in a challenging market environment, this asset class remains attractive.”
This was best illustrated with the financial closing in April 2020 of one of the largest floating solar projects in the world costing NT$7.3 billion (US$264 million) – the 181MW Changhua project. “It is a new asset class in the region and it is an asset class in which Asia is likely to lead the way globally,” says the senior project finance banker. “There are more opportunities in solar energy in this part of the world.”
This project also demonstrates how Taiwan is embracing new and innovative renewables technologies, which contribute to the ambitious solar energy target set by the government to reach a solar photovoltaic (PV) capacity of 20 gigawatts (GW) by 2025. The project was initially supported by private equity firm I Squared Capital and then acquired at financial close by Marubeni Corporation of Japan.
Last year also saw the first solar project in Indonesia that was funded by an international commercial bank, Societe Generale – the Quantum and Sambelia solar power projects located in the islands of Sulawesi and Lombok, which have a combined capacity of 22MW. While solar is a new sector in Indonesia, the prospects are bright with the Indonesian government reportedly targeting to deploy 6.5GW of solar by 2025 and 45GW by 2050.
The Middle East going solar
In the Middle East, solar energy is a fast-growing sector, and a combination of well-established public-private partnership regimes, strong global sponsors, and creditworthy offtakers is creating strong appetite for bank lenders.
The United Arab Emirates, for one, is committed to supporting access to the capital markets, and is encouraging bank debt refinancing with project bonds with the help of structures such as hard mini-perms. For the 2GW Al Dhafra 2GW solar project in Abu Dhabi, Emirates Water and Electricity Company (EWEC) backstopped the refinancing risk via a tariff readjustment mechanism. This type of structure is likely to become increasingly common.
For the more difficult jurisdictions, such as Oman which went through a series of downgrades over the course of 2020, there will be more reliance upon multilateral development bank and export credit agency (ECA) support. The Ibri II Solar PV Independent Power Plant was the first renewable energy deal of the Asian Infrastructure Investment Bank (AIIB) in the Gulf Cooperation Council (GCC) region.
Middle Eastern governments are planning for a future with dwindling oil revenues, and there is a regional trend to bring in foreign infrastructure investment – whereas five years ago most governments were happy to keep infrastructure in state-owned hands.
This trend was best illustrated by the US$10.1 billion sale of 49% stake in ADNOC Gas Pipelines, a new unit created by Abu Dhabi National Oil Company, which is bringing in fresh investment to unlock capital and reinvest in its strategic growth. This deal was structured to generate stable long-term revenues, and attracted a consortium of some of the world's top infrastructure investors.
This type of deal is likely to be replicated, as infrastructure funds continue to attract cash in search of yield against a global background of low interest rates. In fact, ADNOC's regional rival Saudi Aramco has recently sold a stake in its oil pipeline network.
Chinese active in Africa
Across Africa, Chinese financial institutions are likely to continue to play an important role, supporting Chinese firms building roads and railways, exporting equipment, or mining for copper and cobalt.
Sinosure provided cover for a South African rand-denominated loan for the first time, in support of Huawei equipment being delivered to mobile operator Telkom. The market can expect more such deals in emeging-market currencies.
But in spite of the high-profile role of China in Africa, many other countries are taking advantage of opportunities there, given the busy pipeline of projects, notably in the road, rail and airport sectors.
In Tanzania, a 541-kilometre stretch of Standard Gauge Railway is being built by Turkish contractor Yapi Merkezi, and the financing was structured with EKN of Sweden and EKF of Denmark as the fronting ECAs, with a group of other ECAs providing reinsurance.
KfW IPEX also continues to be active in Africa, including for highways and airports in Ghana.
Across South America, there are now well established PPP regimes in countries including Colombia, Brazil and Chile.
As the most developed financial market, Chilean projects can attract uncovered commercial bank debt, as was the case with the second phase of the 1.3GW Andes Renovables project.
Brazil is moving ahead with very large concession projects, which for the moment rely on a combination of equity and development bank debt, notably from BNDES. The US$3.4 billion PiPa road concession in Sao Paulo is the largest-ever put up for auction in Brazil, and was won by local institution Patria together with GIC of Singapore.
North America and Europe
In North America, onshore wind is a booming industry, and the acquisition by a Korean consortium of wind assets in Texas, Illinois and Nebraska is likely to be the start of significant interest out of Korea.
Gas-fired power is also a theme in the United States, not surprising given its increased gas production which includes ambitions to export more LNG to Europe. There is a steady flow of M&A deals in this sector, as was the case with the acquisition of two gas-fired plants in Minnesota by Southwest Generation together with infrastructure funds. The deal was financed with a 19-year private placement of bonds, illustrating the appetite of US institutions such as pension funds for long-dated paper.
In the European Union, the move towards sustainability is being accelerated under the EU Commission headed by Ursula von der Leyen, who last year launched the European Green Deal.
The project pipeline for offshore and onshore wind, and solar, keeps growing, and European banks are emerging as global leaders in arranging Green Loans and Green Bond offerings. Last September the German Federal Government sold a green sovereign bond for the first time, and has a strategy of providing investors worldwide with a green yield curve as a reference point.
The EU is also moving to put in place its own supply chain of lithium ion batteries for electric vehicles, ending its overdependence on imports from Asia, as it sets ambitious targets for phasing out the combustion engine.
The US$3 billion Northvolt Ett LIB gigafactory in Sweden is a strategically important energy transition project for the EU. The loan was supported by the German government via an Untied Loan Guarantee provided by Euler Hermes, illustrating how the EU has embraced the idea of an industrial strategy – something that had fallen out of fashion (except perhaps in France) ever since Margaret Thatcher became UK prime minister in 1979.
But regardless of government support, the private sector in Europe has made a decisive shift towards sustainability. One example is Volkswagen, which signed the first green loan Japanese operating lease with call option (Jolco) for shipping assets, for two LNG-powered car carriers operating exclusively for the company between Germany and North America.
Japan’s potential in offshore wind
Back in Asia, Japan has also manifested its potential in the offshore wind space with the 140MW offshore wind farms in Akita and Noshiro ports in Akita prefecture. Achieving a financial close in February 2020, this is the first large-scale commercial offshore wind project financing in Japan and the first of a series of so-called ports and harbor offshore wind projects being developed with the support of the Japanese feed-in tariff for renewable energy projects. There are suggestions that over time, Japan has the potential to dwarf Taiwan in terms of capacity in offshore wind.
Taiwan, meanwhile, continued to grab the headlines in terms of offshore wind with the financial close, also in February 2020, of the NT$90 billion Changfang and Xidao project. The 589MW project is the largest offshore wind farm in Taiwan and has the highest local content requirements among the offshore wind projects in Asia-Pacific to date. This is also the first Taiwan offshore wind farm project to have equity participation by local insurance companies – Taiwan Life Insurance Company and TransGlobe Life Insurance.
But it is Vietnam that is attracting a lot of focus from among sponsors and lenders in terms of renewable energy projects that stood out during the review period. This is reflected by how fast the country was able to build and install capacity in solar energy.
One of the projects that defined the Vietnamese renewables market is the Phu Yen TTP Joint Stock Company US$248 million project financing. The 257MW project is the largest single operating solar power plant in Vietnam and the financing features the first green B loan in Asia-Pacific by the Asian Development Bank to be certified by Climate Bonds Initiative.
With the renewables dominating the project finance space in the region, it also undergoing an evolution in the way that the industry is structuring itself. As the senior project finance banker explains, they are doing transaction with a significant merchant component. “Clearly, the market will go into that direction over time as the renewable energy sector becomes more mainstream. It will have to move into a more dynamic type of transaction with higher exposure to market risk as it pushes into more merchant type of transaction.”
Gas plays key role in energy transition
Another theme that reverberated in 2020 is the role of gas in the energy transition strategy. As the senior project finance banker points out, gas is playing a substitute role to coal and this will accelerate going forward. Bangladesh is already a gas market, while other countries such as Vietnam, India and Indonesia are now increasingly looking at developing gas.
As recently as last year, new coal-fired power plants were still being funded as in the case of a 2,000MW project in Indonesia, a joint venture between a subsidiary of the state-owned Perusahaan Listrik Negara, Barito Group and Korea Electric Power Corporation (Kepco). The project achieved financial close in October 2020 and it was one of the largest project finance fund raisings for Indonesia last year. But funding coal-fired power projects is coming to an end, and gas will be the substitute for base load capacity.
There is, indeed, a real case to be made for gas to be complementing renewables and be used as a back-up source of energy that can support renewables. We are seeing more investments in Asia in the gas sector and gas has emerged as an important component in Vietnam’s energy mix. The senior project finance banker says: “That is new. Three years ago, nobody was talking about gas in Vietnam – it was all about coal.” Gas is a new conversation topic in this market with the likes of Marubeni and other companies looking at developing gas in Vietnam.
Two things have changed and contributed to the emergence of gas. Firstly, the price of gas has fallen as more LNG supply come to the market from the United States, East Africa and very soon, from Australia, Papua New Guinea and the Middle East. The supply and availability of gas has increased dramatically. Gas has become more affordable than it used to be.
Another thing that has changed is the fact that the discussion between coal and gas is no longer based on economics. It is now about social acceptability of building and owning those assets. The usual argument has always been that coal is cheaper, which makes gas irrelevant. This is no longer the case. Capital is fast drying up in building coal-fired power plants as banks announce their policies to stop funding those projects – though some banks took longer than others to make such a decision – and institutional investors no longer want coal to be in their portfolios.
For instance, Dutch pension fund APG announced in January this year that it has sold its stake in Kepco after the Korean company gave the green light to the construction of new coal-fired power plants in Indonesia and Vietnam. “In line with the sustainable ambitions and goals of its pension fund clients, APG strongly opposed this plan,” it says. “Companies need to stop planning new coal-fired power stations and to develop a strategy to greatly reduce greenhouse gas (GHG) emissions.”
These developments have opened a vacuum for gas to become relevant in several markets in the region. The environment is conducive for investing in gas because in as much as the economies are growing, there is a need for base load energy to support those levels of growth and renewables cannot be the only source. So there has been a paradigm change from the cost and competition standpoint that makes gas a suitable asset class for the region.
For the complete list of Best deals globally, please click here.
For the complete list of Best deals in North Asia, please click here.
For the complete list of Best deals in Asean, please click here.
For the complete list of Best deals in South Asia, please click here.
For the complete list of Best deals in Australia, please click here.
To learn more about these awards, please click here.
For more information about receiving the awards, please contact [email protected]
The virtual awards ceremony for The Asset Triple A Infrastructure Awards 2021 is schedule to take place on August, 2021.