The road king of Asia

Korea''s first infrastructure fund has been launched by Shinhan Macquarie. It could prove a boost to the bond market.

In Korea they have a saying, 'Plali, plali', says John Walker, which means "quickly, quickly". It is one of the reasons he and Macquarie are so keen on Korea.

Shinhan Macquarie Financial Advisory, a joint venture between the Korean bank and the Australian investment bank, has been in operation for just over a year, and by December 28, 2002 had already launched Korea's first infrastructure fund.

Walker, who is CEO of the JV, is very bullish on the infrastructure sector in Korea, in particular, toll roads. He notes that Macquarie is involved "in 22 countries and Korea is our most exciting market. The government will spend $150 billion over 10 years on infrastructure and nearly half of that is on roads."

The fund's first close saw it raise W247 billion ($208.6 million) and W150 billion will be raised in the second round. The fund has lined up seven road projects that it wishes to inject, including the Kwanju Beltway, which it intends to buy from Daewoo Engineering for an undisclosed sum.

"We are aiming for a target rate of return of 15% and hope to float the fund within two years," says Walker. "There is no similar type of equity which should ensure the eventual IPO is successful."

The fund can inject assets from ports to airports, but its priority is roads. He notes there are 30 major roads currently under construction in Korea, putting it second only to China in the road construction stakes.

The fund raised all its finance from Korean institutions - which he says have a better understanding of the country risk issues and the potential returns. Macquarie injected W30 billion itself, however. "W30 billion is the largest amount Macquarie has ever seeded in any of our funds. As far as we are concerned, Korea is the outstanding market in Asia," says Walker.

Some of the roads it expects to inject are greenfield projects, such as the $1 billion Seoul to Chucheong expressway. He adds that this road will be the fund's most significant investment.

Such projects will funded with around 70% debt and 30% equity. Walker says the debt will mostly come from local banks but he also says the fund may ignite the market in local won-denominated infrastructure bonds.

"We are now designing project bonds with the local investment banks," he says. "My theory is that infrastructure bonds will become a more significant part of the local bond market. There could be as much as W250 billion of bond per road."

He predicts that infrastucture bonds could end up constituting 10% of the overall local bond market. But the project bonds will not be straightforward to design, he admits. They will have to be backloaded in their structure. Says Walker: "We want returns to go to investors while the road is under construction. So the majority of the repayment must be once the road is complete."

One of the things Walker likes so much about Korea is the attitude of the government. It offers very good guarantees to those constructing and operating roads. For example, the new airport road from Seoul to Incheon was built with a 90% government guarantee and thus far the government has coughed up $30 million to meet its commitments, due to toll shortfalls.

Shinhan Macquarie Financial Advisory is 51%-owned by Shinhan and 49% by Macquarie; while Shinhan Macquarie Infrastructure Management is 19.9% Shinhan and 80.1% Macquarie.

Walker is bullish on the potential for infrastructure investing across the board in Korea. "Before the financial crisis, Korea didn't realise it needed to put its infrastructure in order," he says. "Then the penny dropped. The government adopted a global approach to the economy. It realised that good transportation infrastructure was required. It also realised that $200 billion was required, and so it would have to harness private capital. This is part of Korea's ambition to be a North Asian hub."