IFR Asia Asian Development Bank Roundtable 2019: Roundtable participants

IFR ASIA: The deal we’ve just been talking about from Clifford Capital was in US dollars. If you try to bring project financings to the local capital markets, who are the investors there? Where does the money come from? KYOSHI NISHIMURA, CGIF: As I said earlier, project bonds are not so common in developing countries or ASEAN bond markets, except for Malaysia. However, in the last few years actually we have also seen some good examples of project bonds in other ASEAN countries. In Indonesia there have been a number of project bonds issued in the rupiah bond market. We did the project bond transaction I mentioned in Philippine pesos, and that was followed by a project bond for a hydro power company. Also in Thailand we see a number of project bonds, so it’s coming but still limited. I think Clive made a very good point about single asset project bonds. If you look at the global project bond market, the total size even including developed markets is about US$40bn–$50bn per year. That means, of all the projects financed in the world, only 10%–15% are done by project bonds and 85%–90% are by banks. This ratio hasn’t really changed in many years. One reason is that you cannot expect normal bond investors to become project finance experts; they don’t have the internal capability to analyse project finance risk and manage these risks. Some global institutional investors, insurance companies or big pension funds have set up special teams for project finance, hiring project finance bankers from commercial banks, but those are very limited examples. If you look at the range of investments these institutions manage, you cannot really expect them to become project finance bankers. The portfolio approach that Clive has explained really takes project finance risk and structures it in a way that a wider group of institutional investors can invest in infrastructure projects. I think it makes a lot of sense. This may also be applicable in emerging bond markets, where institutional investors may not be as experienced or – I don’t want to use this word – sophisticated as bond investors in more developed markets. We’ve also seen some ASEAN infrastructure companies issue normal corporate bonds, after their projects are completed. If the project is stable and their rating is high enough, local institutional investors can invest in normal corporate bonds issued by project companies, sometimes even on an unsecured basis. The two major toll road companies in the Philippines are good examples. We also this year saw a very similar example in Thailand, where power projects of B Grimm also issued normal corporate bonds after originally using project finance from the bank market. So that’s maybe another way to develop the capital markets for infrastructure. IFR ASIA: Question to you on that, Katharine: if I’m an investor, how do I know that my money is going towards sustainable development, and not a company’s next coal plant? KATHARINE TAPLEY, ANZ: That’s a good question, because money is fungible, so it does all go into one pot. The principles around green and sustainability bonds are very clear in making a very strong recommendation to provide regular reporting and transparency on how the money has been used. Certainly our experience is that investors are pretty demanding on this. Investors are not just sitting back and getting themselves into green bonds and then not following up on the reporting. They will want to see reporting at least annually, sometimes twice a year, not on just how proceeds have been used but also what the impact of that money has been. The concept of understanding the impact of their investment is gaining a lot of currency. “There is an increasing role for structured finance in terms of facilitating the transfer of project finance loans from bank balance sheets into the capital markets and thereby crowding in institutional debt.” Actually the sustainable development goals are increasingly becoming a framework, if you like, throug

IFR ASIA: Welcome everyone. I’m going to ask KathArine to frame this discussion for us at the start. Why is financing sustainable infrastructure so relevant to this part of the world? KATHARINE TAPLEY, ANZ: When you think about the already existing effects of climate change, particularly in the Pacific region, then the need to fund long-term infrastructure is vital. There really is no choice in my view as to what needs to happen, and I think the sustainable finance markets have a very significant role to play. We’re seeing significant appetite from investors for so-called green assets, but there is a broader concept around sustainability and sustainable development. There is an absolute wall of capital there waiting to be deployed into infrastructure that helps economies – such as Fiji, for example – and the broader region sustain their economies for the long term. IFR ASIA: Thank you. Nishimura-san, what’s the role of the local capital markets? KYOSHI NISHIMURA, CGIF: So today we are talking about financing for infrastructure projects, especially sustainable infrastructure projects. Sustainable infrastructure projects are projects which are sustainable in terms of their climate or environment or social impact. How these assets are financed is also important to their sustainability. Infrastructure projects need long-term funds because of their long-term payback period. Many projects rely on revenues that come only after they are completed. These revenues are generated in the local currency, so if you borrow in foreign currency that creates a mismatch problem for the project. So if an infrastructure project is really going to be sustainable, it should really be financed by long-term local currency funds. The good news is, if you look at emerging Asia – and it may be different from elsewhere – most infrastructure projects are already financed by the domestic financial system in their local currency. According to World Bank and ADB data 70%–80% of PPP-type projects are financed domestically in the local currency. That is good news. It is better than before the Asian financial crisis, when many projects were borrowing short-term, foreign currency loans. The problem here is that when we talk about finance in the domestic financial system, it still means in most Asian countries we are talking about the banking system. The financiers are local banks, which may still create a problem in asset/liability mismatches in the banking system, because banks basically rely on short-term deposits to finance these long-term assets. So that is the reason why the ASEAN+3 governments are trying to develop a bond market to create a more balanced domestic financial system. Long-term infrastructure projects – especially sustainable infrastructure projects – should be really financed with long-term, local currency funds in the bond market. At this moment some infrastructure projects in emerging Asia are already financed through the bond market, but they’re usually from companies issuing general corporate bonds. We aim to promote more project bonds, which are issued at the individual project level on a project finance basis, just like a project finance loan from the banks. You can issue project bonds which match the cashflows from a project at a longer tenor than a general corporate bond. In emerging Asia, you don’t really see many project bonds. Malaysia is the only country in Asia that has successfully developed a project bond market, where most projects – even greenfield projects – are funded through project bonds or Islamic sukuk. “There is an absolute wall of capital there waiting to be deployed into infrastructure that helps economies – such as Fiji, for example – and the broader region sustain their economies for the long term.” There is also good news about green bonds. As Steve mentioned, growth last year in emerging Asia was 35%. Actually it’s the fastest growing green bond market in the world and has become already the global leader in the gr

Sustainable infrastructure was high on the agenda at this year’s Asian Development Bank annual meetings in Fiji, where climate change and ocean health have a pronounced impact on everyday life. The capital markets are also showing a growing interest in sustainable development, but Asia is still a long way from harnessing the market’s full potential. IFR’s latest in a series of knowledge-sharing seminars with the ADB set out to look at the role of the capital markets in providing long-term financing for Asian infrastructure. Across the region, the vast majority of infrastructure projects are funded by local banks and local governments, leaving the growing pool of institutional capital untapped. Efforts to connect institutional investors with long-term investment opportunities have led to a number of recent landmark financings, including project-related bond issues in US dollars and local currencies and Asia’s first securitisation of project finance loans. Demand, however, still exceeds supply – by some distance. And with a growing range of institutional investors now looking for sustainable and socially responsible investments, the shortage of opportunities in Asia is set to continue. The Climate Bonds Initiative, the main NGO tracking green capital markets, put the global green bond market at a size of US$521bn at the end of 2018. Asia was the fastest-growing market for issuance last year, rising 35% in 2018, with the ADB itself now among the world’s biggest green borrowers. Asia’s capital markets are also growing. The ADB’s figures show total outstanding local currency bonds in ASEAN plus China and Korea have now reached US$12.7trn, on par with the entire euro market. These dynamics give Asian infrastructure developers – in both the public and private sector – an opportunity to use the capital markets to match their long-term assets with long-term, fixed-rate funding. Creating structures that appeal to capital market investors, however, has been a challenge. The panel discussed several initiatives to bring more infrastructure-related assets into the local and international bond markets. Notably, CGIF, the multilateral credit enhancement vehicle focusing on South-East Asia, is leading the development of a new facility specifically to support infrastructure financings in local currencies. The Infrastructure Investors Partnership also aims to raise part of its funding in Japan’s capital markets, giving investors there some sought-after regional exposure. Singapore-based Clifford Capital is also looking to follow up last year’s groundbreaking project finance securitisation with a second deal, with future enhancements such as a warehousing facility in the works to give banks an easy way to recycle their capital. ANZ is deeply involved in a push to develop sustainable finance across the region and especially in its home markets of Australia and New Zealand, where appetite for responsible investments is surging. The Australian market, in particular, is nearing the point where companies could soon be at risk of losing access to capital if they cannot demonstrate their commitment to a sustainable future. Infrastructure financing – particularly for sustainable, climate-resilient assets – sits at the crossroads between the conventional capital markets and development finance. A smoother connection between the two would have an enormous impact. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@refinitiv.com