Funding for project finance in Asia is in high demand as the region strives to update its infrastructure. Asian Development Bank has estimated that $1.5 trillion is needed every year until 2030 to keep up with the funding requirements. But finance has been lacking, with limited options available in the capital markets for private investors to buy, while banks’ balance sheets are stretched just keeping up with the huge demand.
Against that backdrop, the multilateral development bank Asian Infrastructure Investment Bank (AIIB) and Clifford Capital, a structured finance solutions provider backed by the Singapore government, set up the new Bayfront Infrastructure Management (BIM) platform in November.
The two partners hope to plug the funding gap by acquiring brownfield projects and infrastructure loans from banks, which have been the largest lenders in the sector, and repackaging them as securitized notes to be sold to institutional investors in the public market.
BIM will sponsor, structure and manage the issuances, working as an aggregator. Debt issued by BIM to acquire and warehouse loans from banks will have a guarantee from the government of Singapore, but the securitized products that BIM will structure and distribute will not.
AIIB will take a 30% equity stake in BIM, and Clifford Capital will hold the other 70%. The platform is expected to be operational in the first quarter of 2020.
The platform helps solve the chicken-and-egg conundrum that has plagued Asia’s infrastructure market, says Stefen Shin, AIIB’s senior investment officer, investment operations.
By recycling bank loans, BIM will free up the banks’ balance sheets to provide more loans, and it will give global institutional investors an accessible, diversified asset class to buy into. All of this, in turn, will bring down the costs of funding as well.
“The idea here is to create a new asset class,” says Clive Kerner, chief executive of Clifford Capital.
Project finance needs trading, liquidity, benchmarks and research to attract funds. Large global insurers, pension funds and endowments are expected to buy BIM’s products, he says.
AIIB’s Shin adds: “Right now, emerging market infrastructure is being invested in by institutional investors, but it’s on an ad hoc basis. The credit quality tends to be quite low and institutional investors tend to want something in investment grade.”
BIM plans to generate consistent deal supply annually. AIIB and Clifford Capital expect BIM to print $5 billion of primary securitization deals over the next 10 years. About 70% will be triple-A rated, says Shin. BIM will typically hold some loans on its balance sheet, waiting until they are ready for market consumption, he adds.
The need for a platform like BIM is spurred not just by demand for project finance but also by changing regulations that are putting pressure on bank balance sheets and changing the ways that banks finance projects in Asia, Kerner says.
Where banks used to hold loans for 15 to 20 years, they are now being pressured to recycle the loans, letting them go after three years or so, he says.
Asian banks “don’t have a culture of ‘originate and distribute’,” adds Shin. “Certain banks do want to recycle… but what they say is: ‘I want to recycle, but no one wants to buy these’.”
Shin says that the challenge is for the banks to break this mentality. By using BIM, the banks can rely on standardization to attract investors.
He says: “We are trying to change that paradigm and create a market.”
Here, Singapore will have a key role to play. It has already made its mark in building the infrastructure financing market. Clifford Capital made its debut in collateralized loan obligation cash flow securitization last year. In July 2018, the company rolled out the first fully project finance-backed CLO in Asia – a $458 million transaction that was split between $320.6 million Class-A notes, $72.6 million Class-B notes, $19 million Class-C notes and $45.8 million subordinated notes.
The deal, which was issued by Bayfront Infrastructure Capital, was used as a proof of concept for Clifford Capital, as it demonstrated the viability of the product and asset class as an attractive option for investors.
Given the success of that deal, the Monetary Authority of Singapore and other government stakeholders encouraged Clifford Capital to set up BIM and build it into a scalable business, says Kerner.
“What we are really trying to do here is create a hub for infrastructure finance in Singapore,” he adds.
First published on GlobalCapital.com