Asia has massive infrastructure funding needs but, in spite of this, the region's project bond market has never really taken off - for a myriad of reasons ranging from a lack of investor familiarity to the dearth of suitable infrastructure projects.
However, the Credit Guarantee & Investment Facility (CGIF), a multilateral facility affiliated with the Asian Development Bank, could be about to guarantee its first project bond, its chief executive Kiyoshi Nishimura told participants at law firm Latham & Watkins’ project bonds seminar held in Hong Kong on Tuesday.
“We are currently working on our first guaranteed project bond,” said Nishimura. “CGIF will provide the guarantee so that the project bond can enjoy CGIF's high credit rating which is AA+ by S&P,” he said, adding that the funds will be used to refinance a project finance loan. He later declined to provide any specific details on the bond.
CGIF was established by the Association of Southeast Asian Nations members, China, Japan, Korea and the Asian Development Bank, and was established as a trust fund of the ADB.
Providing a guarantee will effectively mean that investors will be exposed to CGIF’s risk. Such a credit enhancement is aimed at getting investors more comfortable with a project bond, which typically offers investors access to the cash flow of the project, rather than the company.
Amid the region’s infrastructure build-out in countries such as China, India and Indonesia, Asian companies are hungry for funds. The local currency bond market offers a natural avenue to finance these projects, as many companies prefer to raise funds in their domestic currency rather than US dollars to minimise the risk of currency fluctuations.
However, project bonds have been off to a slow start in Asia. Nishimura cites numerous obstacles, including a lack of familiarity among local currency bond investors with investing in project finance bonds.
Project bonds often have complex structures and covenants and require active and continuous involvement from creditors to monitor the progress of a project. While investors in North America and Europe have accumulated knowledge of project bonds, this is not the case in Asia and there is little impetus for Asian investors to become familiar with project bonds unless there is a critical mass.
“For bond investors in this region to acquire expertise and set up internal capacity to monitor project bonds, there must be reasonable certainty or firm expectation that the market will become large enough to justify the cost of acquiring such expertise and taking up internal capacity,” said Nishimura. “This will only come when the market has developed enough,” he added.
Other obstacles include the scarcity of “bankable infrastructure projects” in the region, and the lack of a legal framework to support private sector investment into infrastructure projects. Investors have also been burned by project finance bonds in the past, with Indonesia PT Paiton Energy's project bonds, which ran into difficulty during the Asian financial crisis, being one example.
However, with lenders withdrawing from the project finance market, this could push more companies towards the capital markets for funding. “Basel III is putting increasing constraints on the ability and capacity of commercial banks to lend,” said Bryant Edwards, a partner at Latham & Watkins, who was also speaking at the seminar.