A range of providers are currently meeting Asia’s infrastructure financing needs, but the region’s requirements show no sign of stopping, writes Kevin Godier.
Although Asia is not alone among the world’s regions in its massive need for new infrastructure, it stands out prominently due to years of economic development at a pace unmatched globally. The region’s macro drivers are such that its share of global GDP is estimated to have surged from 23% in 2001 to 33% in 2012.
The next two decades are predicted to add another 650 million to the Asian urban population. In the next decade alone, “we estimate the infrastructure needs of Asia and Pacific are US$8tn… US$800bn each year”, said Takehiko Nakao, the president of the Asian Development Bank (ADB), speaking at a press conference in Astana in early May. Nakao said he would be “very happy” to co-operate with the planned US$50bn Asian Infrastructure Investment Bank that China is setting up to develop infrastructure projects in Asia, which would complement the lending that the ADB ploughs each year into energy, transportation and other key areas.
However, the funding numbers are set to become so elevated that “public sector bodies such as governments and multilateral banks will lack sufficient capacity to finance this”, says James Cameron, head of project finance, Asia Pacific, capital financing at HSBC.
He says that Asia’s commercial banking market offers sufficient intellectual capital – in advisory and arranging roles – and enough financial liquidity to support those projects in the region where it is asked to participate. “But the pipeline of Asian infrastructure projects is already very significant, and even a slight percentage increase in the requirements will see the need for other forms of capacity,” he predicts.
Cameron highlights that deals have flowed at their quickest in the markets where public sector authorities are able to progress the procurement pipelines: “There have been procurement delays in the last 12 to 18 months, with some models and structures working better than others.”
What cannot be gainsaid, indicates John Corrin, global head of loan syndications at ANZ, is banking appetite for the sector: “Just about every bank globally is interested: appetite abounds for the right names, structure and pricing.” Cameron points to a recent entrance of secondary Japanese banks following their clients into Asia’s project markets. “The Japanese banks showed their hand in a very strong response to the US$3bn-plus Nghi Son greenfield refinery deal in Vietnam,” he says.
One market with major needs is Bangladesh, where HSBC closed a power financing package in January 2014. “Bangladesh is a developing market that has material infrastructure financing needs,” says Cameron. HSBC arranged the financing for the state-owned Ashuganj Power Station Company Limited (APSCL), to develop the 450MW combined-cycle gas-fired Ashuganj South power plant. This is expected to provide nearly 12,000 households with electricity in a country where an estimated 38% of the populace lack power.
The perceptions of political risk in Bangladesh are such that the World Bank’s Multilateral Guarantee Investment Agency (Miga) extended a US$221mn guarantee to the financing of the power plant, covering the lenders against the risk of non-honouring of sovereign financial obligations for a period of up to 13.5 years. “The high political risks mean that strong protection is required for the sector, to reinforce the various undertakings and obligations,” stresses Michel Wormser, Miga’s vice-president.
Asia’s continuing economic stride saw the region account for 18% of Miga cover in 2013, says Wormser. However, the region’s key infrastructure market, China, typically funds itself from domestic sources, according to bankers. “During the 12 months ending April 2014, China has shown the most demand for infrastructure debt among Asia Pacific countries,” says Corrin. Of some 522 deals worth US$154bn completed in the region over the period, US$51bn worth, or 33% of the volume, came from China via 75 deals. This was followed by Japan – another market where domestic lenders dominate – with US$24bn (217 deals), Australia with US$19bn (46 deals) and then India with US$17bn, again dominated by local banks.
Corrin comments: “Chinese infrastructure loans will continue throughout the course of this year as the government continues to drive policy. Notably, the majority of this financing is in renminbi.” This included a huge five-year, Rmb22.9bn (US$3.67bn) deal mobilised in mid-2013 for Suzhou Rail Transit Company for construction of extended sections on an extensive light-rail network planned for completion in 2020. Cameron points out that China remains “very much an advisory market for HSBC”, but that there are “increasing opportunities for banks to lend, especially for joint ventures between international and domestic clients”.
Australia, by contrast, is a truly international market. “Sponsors and banks from all over the world are involved – the market will provide a lot of opportunities for mergers and acquisitions, especially with regard to infrastructure assets which are coming up for sale,” says Corrin. One of the biggest Australian transactions last year, he says, was the A$2.5bn (US$2.34bn) Aurizon Networks deal completed in June 2013. This comprised a three and five-year refinancing by banks of a debt legacy after QR National floated in 2010.
“There is something of everything in Australia: ports, railways, LNG, iron ore and coal, as well as motorways and tunnels,” observes Corrin. “Alongside the domestic equity investors we see Canadian players, including Ontario Teachers and other pension funds, and Spanish investors are looking with interest at a stable, AAA-rated country with a highly-developed legal system.”
He forecasts a greater role for asset managers and insurance and pension companies as the Basel III capital adequacy ratios kick in for Australian banks. “A few years on, the Basel protocols will hinder long-dated funding for banks, forcing them to focus on their core areas. This will open a gap for other forms of long-term capital looking for a home,” he underscores.
Cameron cites HSBC’s involvement at the A$10bn Roy Hill railway and iron ore plant in the Pilbara region of northwestern Australia, where US Exim has provided direct lending and export credit agencies (ECAs) from Japan and South Korea are participating in ongoing financing.
Cameron also flags Vietnam as a growing market. “There are a number of deals in the pipeline, but the procurement process is slowing projects down,” he says. Wormser notes that Vietnam “has some large infrastructure gaps, for which substantial financing is needed”. In March 2014, Miga provided fresh support with the issue of a US$500mn guarantee for a key road rehabilitation project, covering a loan from a syndicate of 12 commercial banks to support the construction financing of the BT20 National Highway 20 Project, connecting Dalat to Ho Chi Minh City. Miga’s guarantee covers 12 commercial lenders, including SMBC and Goldman Sachs, against the risk of non-honouring of sovereign financial obligations for a period of up to 15 years.
Vietnam is inevitably a target market for the private political risk insurance (PRI) community, given the combination of its emerging market status and infrastructure financing need. Based on enquiries received by BPL Global, Vietnam is “the most active country” in this respect, says Peter Gilbert, chief executive of BPL Global, Hong Kong. Other countries generating infrastructure cover requests include Sri Lanka, the Philippines and Indonesia, he adds, with the most active sector being power. “Other active sectors include transportation, oil and gas.”
Vietnam is also top of the equivalent list at Jardine Lloyd Thompson (JLT). “In the last 12 to 18 months, the key demand has come from power and public works in Vietnam and Indonesia and in Mongolia’s mining sector,” points out Mark Wong, managing director of CPS at JLT Asia.
Cameron notes that HSBC has provided financing advisory services in Indonesia for the next stage of PLN’s power procurement process; and in the Philippines, where it is advising a consortium of EGCO (Thailand) and the local parastatal Meralco on a forthcoming phase of coal-fired power generation capacity. “The Aquino administration has said that infrastructure is a priority: there is lots of work surrounding procurement, and in getting the private sector into public-private partnerships,” he says.
He emphasises that “different solutions are required in different markets”. In Malaysia, for example, HSBC – through its HSBC Amanah subsidiary – led a sukuk deal for Southeast Asia’s biggest power company, Tenaga Nasional Berhad. The RM1.625bn (US$503mn) serial senior secured instrument carried tenors ranging from four to 23 years when issued in May 2013. The sukuk proceeds will be utilised for the construction, delivery and working capital requirement for a 1,071MW combined cycle gas-fired power plant in Seberang Perai Tengah, Pulau Pinang, which is expected to help meet part of the power demand in the peninsula by 2016.
Whereas the trend of financing infrastructure deals in bond markets remains most prevalent in the US and European project markets, Asia has long been a major arena for ECAs supporting infrastructure in the region. India’s National Thermal Power Company (NTPC) secured US$530mn in debt from Japanese lenders including the Japan Bank for International Cooperation in early 2014. Nippon Export and Investment Insurance (Nexi) provided insurance cover for the transaction, supporting equipment purchases for coal-fired plants in the Kudgi district of Karnataka state. In Myanmar, the Export Import Bank of India recently extended over US$350mn to upgrade railways and improve irrigation. Even in the very prosperous South Korean economy, Germany’s Euler Hermes deployed cover at the start of 2014 for a 14-year, €194mn loan for the expansion of a combined-cycle power plant at Incheon.
Cameron flags up the “increasing activity” of South Korean ECA K-Sure in supporting a “very competitive Korean sponsor and equipment supplier base”. K-Sure was involved recently in a US$309mn financing deal closed by Standard Chartered for a floating storage and regasification facility being built by Hyundai Heavy Industries for deployment by Höegh LNG in Lampung, West Java. Gilbert cites K-Sure, Nexi, Miga and China’s Sinosure as active ECAs in Asia’s infrastructure space, but says that “some public insurers must follow certain environmental guidelines and therefore shy away from coal-related transactions”.
Wong notes that Sinosure has been looking at medium to long-term business for five to 10 years, and “is the most important market player now among ECAs”. In terms of appetite, the ECAs from Korea and Japan are also up there, he says. Corrin explains that the presence of ECAs in infrastructure can be down to the sheer scale of projects, as happens in Australia, or due to the underlying country risks involved in Indonesia, or the more overt risks pertaining in Laos or Mongolia.
According to Gilbert, the continued development of the private PRI market – in particular its increased capacity and tenors – has added a viable alternative to official insurance. “Capacity is available for up to 15 years which is sufficient for most projects.”
Wong notes private PRI capacity of up to US$400mn to US$500mn per risk, depending on country limits. “We don’t see any risks that the private market shies away from and, over the past three to four years, are seeing more public-private partnerships. In these, ECAs will typically take the whole risk, then collaborate with the private market to remove certain layers of the risk.”
Concluding, Cameron agrees that financing and insurance choices for project sponsors are widening. “However, if the Indian and Chinese markets open more, and the Indonesian pipeline gets bigger, capital will undoubtedly become more scarce,” he warns.