Thursday, 18 July 2019

Project runway

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  • An airport employee stands inside the newly constructed T3 terminal of Indira Gandhi International Airport in New Delhi.

Longstanding ambitions to bring Asian infrastructure financing into the capital markets have taken a giant step towards reality with the refinancing of Delhi International Airport. Are project bonds finally taking off in Asia?

Delhi International Airport put project bonds firmly on the global radar in late January, when it refinanced project loans with a hugely popular US$289m seven-year secured note.

Priced to yield 6.125%, the offering drew orders of over US$5bn and marked one of the first overseas high-yield issues of the year from Asia, coming as default fears had left Chinese property companies frozen out of international markets.

Most importantly, it pointed to the potential for infrastructure financing in the capital markets, opening a new connection between long-term investors and project debt, and allowing banks to recycle their capital.

GM Rao, chairman of Delhi Airport’s controlling shareholder, GMR Infrastructure, said the loan would cut interest costs and remove amortisation, reducing the overall financial burden on the airport.

“India has a high savings rate of around 30% of GDP and its infrastructure is deficient. The idea is to put those two sides together with a sustainable delivery mechanism to move those funds into the capital markets.”

“This bond issuance has opened up new avenues for GMR Group to tap a wide pool of investors for our ongoing and continuous financing requirements for our various projects,” he said.

Policymakers and project sponsors have been trying to bring Asian infrastructure projects to the capital markets for years, but previous efforts had resulted in little more than frustration. Only Malaysia, home to a big Islamic investor base, has developed a functioning project bond market, in part thanks to credit enhancement from government-owned guarantee agency Danajamin Nasional.

India’s domestic bond market has little appetite either for low-rated or long-term assets. Delhi Airport, however, was able to use its track record of strong cash flows to attract international investors. It used the proceeds to refinance the remainder of a US$350m project loan from Axis Bank and ICICI.

Citigroup, Standard Chartered were joint global co-ordinators, while HSBC and JP Morgan joined as bookrunners.

“There are many benefits to the development of project bonds,” said Bruno Carrasco, director of the public management, financial sector and trade division of the ADB’s South Asia department. “They can reduce maturity mismatches and allow banks to recycle capital faster, which will strengthen the entire banking system.”

Ultimately, for Carrasco, India needs to develop a domestic capital market that is capable of sharing more of the infrastructure burden with the banking sector.

“India has a high savings rate of around 30% of GDP and its infrastructure is deficient. The idea is to put those two sides together with a sustainable delivery mechanism to move those funds into the capital markets.”

Doing so, however, has proven challenging even for the ADB. The Triple A rated multilateral development bank teamed up with Indian Infrastructure Finance (IIFCL) in 2012 to offer partial credit enhancement for infrastructure projects, but the joint venture has yet to guarantee its first financing.

“It is designed to be a pilot scheme, demonstrating that take-out financing is available in the bond market,” said Carrasco. “We are actively engaged with sponsors. However, as with any new asset class, it has taken time to prepare the ground for the first issue.”

IIFCL discussed credit enhancement for road projects under the ADB scheme, but those issues failed to materialise. A mandate letter, however, was signed recently with a renewable energy developer, suggesting that a maiden deal may finally be on the cards.

Rupee investors need high local credit ratings and liquidity is concentrated at shorter tenors, but supply is as much a problem as demand. So far, Indian lenders have been reluctant to offload their better assets – exactly the ones that would attract a following in the capital markets.

Beyond India

Carrasco, however, remains confident that the programme will come into its own as Indian lenders face greater capital constraints.

“The issue is deal flow. When banks don’t see a big pipeline of infrastructure projects coming through, they naturally want to hold onto their performing assets,” he said. “The move to risk-based pricing, as a result of capital and Basel III rules, will change that, but we are not there yet.”

Indian policymakers are also taking up the challenge of deepening the domestic bond market. The central bank, in a discussion paper on concentration risks in the banking system, has proposed that large corporate groups be required to issue bonds for a portion of their annual funding needs, while other recent measures are set to curb the use of bank guarantees for overseas financings – thereby promoting domestic markets.

Narendra Modi’s government has also proposed sweeping changes to municipal finances, paving the way for cities to issue bonds based on their own cash flows.

“The policy environment is increasingly supportive under Modi,” said Carrasco. “Municipal financing will be a new frontier for infrastructure financing, where the public and private sector can work alongside each other.”

The sheer scale of India’s infrastructure ambitions – with a five-year target of mobilising US$1trn of investment – means the potential for a rupee project bond market is many times larger than in other countries. Elsewhere in Asia, however, other initiatives to develop local capital markets are also under way.

“The ADB can help build capacity by supporting these types of bond issues,” said Todd Freeland, director general of the ADB’s private sector operations department. “There is a tremendous opportunity in developing a risk-transfer mechanism. Many investors want exposure to Asian infrastructure, but don’t have the expertise to structure a deal themselves. They can step in once the heavy lifting is done.”

Freeland, a former Goldman Sachs banker turned private-equity fund manager, has expanded the private sector syndications team since joining the ADB in September 2013, using a wider range of credit-enhancement tools to attract co-financing partners.

The ADB’s Credit Guarantee and Investment Facility (CGIF), which specialises in wrapping local currency bond issues to deepen the ASEAN capital markets, has started work on a guarantee for a Philippines geothermal power project in a deal that will also meet green investment criteria.

Malaysia’s Danajamin partnered with the CGIF last year and planned to introduce partial guarantees, chief executive Mohamed Nazri Omar told Reuters in February. Danajamin, with the finance ministry and Credit Guarantee Corp Malaysia as owners, has guaranteed over M$7bn (US$1.9bn) of bonds since its establishment in 2009.

“If we guarantee every single issuance, they’ll all be rated Triple A and there will be no diversity. From a developmental angle, we want to deepen and stretch the market with new products,” Nazri said.

Malaysia is to remove a requirement for mandatory credit ratings in 2017, in an effort to boost market volumes. Close to 90% of all bonds have local ratings of at least Double A.

Thailand, too, is keen to promote baht bonds as a regional funding tool and its liquidity has attracted issuers from neighbouring frontier markets. Electricite du Laos, which sells excess generating capacity to Thailand, has been working on a baht bond to refinance hydro power projects. A similar move has been discussed in Indian rupees for Bhutan, since the tiny Himalayan nation exports electricity to its much larger neighbour.

Most of the local initiatives pale in size when compared to Delhi Airport’s US dollar debut, but the ADB is firmly focused on stimulating domestic debt markets.

“When it comes to liquidating bank assets, local currency funding is a challenge,” said Ryuichi Kaga, head of the ADB’s Office of Public-Private Partnerships.

“Governments don’t want to create contingent liabilities by issuing guarantees on demand. Development banks can help through designing a security package that fits the needs of both the public and private sector.”

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