As a central plank of government policy in Asia, infrastructure financing is critical in addressing the developmental bottlenecks as economies move to the next stage of growth.
Over the past few years, Asian financial institutions have come up with various innovative structures in filling the financing gap for infrastructure projects.
According to Moody’s, for projects in the region that enter the market for financing, over 90% are raised from commercial bank loans. However, with upcoming Basel II and IFRS 9 implementation, it becomes less attractive for banks to lend to long-term infrastructure projects because of the higher capital charge required to hold these assets on their books.
Therefore, new structures, such as project finance CLOs, have been introduced to the market to meet the needs of long term institutional investors.
“CLOs and capital markets are strategic in many ways because we want to create a more liquid market in Asia where we won’t need to hold the assets for 20 years. We would like to be able to exit some of them in five to seven years, for example,” says Luca Tonello, head of Asia global structured finance, investment banking, Asia at Sumitomo Mitsui Banking Corporation.
In 2018, Bayfront Infrastructure Capital issued a US$458 million collateralized loan obligation (CLO), with Clifford Capital acting as the sponsor, marking the first project finance CLO transaction in Asia. Such deals are creating a new source of liquidity for project finance in the region.
“We are seeing more structures participating where institutions are setting up SPVs which raise money for institutional investors doing infrastructures projects. The CLO structure is outstanding and structures like this are more convenient,” says Mukesh Sharda, founding/managing partner at Capital Square Partners.
“The US has some existing trust structures which are not in Asia yet and there are huge opportunities. At present, there are still limited formulas in Asia especially emerging markets. A lot of projects are still underfinanced,” says James Chern, managing director at I Squared Capital.
In Asia, the infrastructure financing gap is currently around US$459 billion per year, according to the Asian Development Bank. On top of bank loans and private equity, mezzanine investors are also looking into infrastructure projects.
“We do see more appetite for mezzanine financing on project loans, commercial buildings, or even BRI (Belt and Road Initiative). Then it is not just a play of private equity putting down 30% and banks putting in 70%. We do have some sectors where mezzanine financing can play a role.” says Marc Freydefont, global head, securitized product & solutions sales at Standard Chartered.
From issuers’ perspective, as there is no obvious pricing difference between a typical bank loan versus a capital market transaction, issuers lack the motivation to initiate a capital market deal.
“One challenge we are facing is that there is no clear distinction between the price at which banks were happy to lend over the last decade and the expectations of institutional investors, insurance companies, pension fund, sovereign wealth funds, and asset managers. Because of the liquidity banks have been pricing very impressively,” Says Premod Thomas, head of corporate strategy at Clifford Capital.
