Bond financing for infrastructure-
Securing funds through bonds is one of the most effective ways to finance infrastructure projects that require regular streams of cash over a long period. For lenders too, such financing seems promising as infrastructure assets provide secure and inflation-adjusted returns in the long term. Like other regions of the world, Southeast Asia is also attempting to strengthen its bond market. The level of bond market development varies widely across this region.
Malaysia is emerging as a star performer not only in Southeast Asia, but globally. In the region as a whole, bond financing for infrastructure has risen in the past fiscal year, which ended in March 2014, but challenges remain.
Rising need for bond financing
The infrastructure requirements of the region are huge, especially in emerging economies. The recently liberalised Myanmar, which has huge scope for infrastructure development, is a case in point. Thus far, public/government financing, and credit extended by the banking sector have remained the traditional sources of funds to support infrastructure development in Southeast Asia. However, increasing fiscal constraints faced by governments in the region as a result of the global economic slowdown have forced attention towards the potential use of bond financing to fund infrastructure projecs.
Bond issuances in the past year
In the year ended March 2014, there was an increase in the number of bond issuances as well as the outstanding amounts of local currency bonds in the region’s infrastructure sector. As of March 2014, 42 bonds worth $55.95 billion were outstanding in the sector, compared to 31 such bonds worth $45.54 billion reported on March 31, 2013. Bond financing remained concentrated in sectors like energy, gas, transport, and communications.
Malaysia had the maximum bond issuances, the financing route favoured by most infrastructure companies. The development of an Islamic financial system in Malaysia allows it to tap the demand for Shariah-compliant investment by Islamic investors. In 2013, Malaysia retained its position of global leader in the international market for sukuk, the Islamic equivalent of bonds. (Sukuk securities follow Islamic laws, sometimes referred to as Shariah principles, which prohibit the charging or payment of interest.) Malaysia accounted for over MYR 266 billion ($82.4 billion), or over 60 per cent of total international sukuk issuances in 2013.
Challenges remain
There are several challenges that impede bond market development, especially in the emerging economies of the region, such as Brunei, Cambodia, the Lao People’s Democratic Republic, and Myanmar. Boo Hock Khoo, Vice-President (Operations), Credit Guarantee & Investment Facility (CGIF), Asian Bond Markets Initiative, says, “In the region, there are only very limited local currency bond markets that finance infrastructure on a non-recourse project bond basis.” With the exception of the ringgit market, most infrastructure projects, if financed by bonds, are funded through sponsors’ or parents’ corporate bonds.
“One key challenge is the familiarity of local currency bond investors and, to some extent, domestic rating agencies with the intricacies of non-recourse project bonds as there are many specific risk parameters, including those relating to construction, for greenfield projects that need to be well understood,” Khoo adds. “The second challenge is the backlog of large projects which ideally require progressive drawdown of debt during the construction period. Many sponsors prefer bank funding for greenfield projects.”
Another challenge relates to monitoring a project and managing consents along the project life. This requires bondholders’ agents with sufficient experience and expertise to advise and manage this function in alignment with the interests of bondholders. Currently, controlling creditors to play such a role for the rest of the investors are virtually non-existent.
CGIF: “Guaranteeing” the path ahead
Identifying the problems associated with attracting investments in bonds, the CGIF aims to take steps to develop the region’s local currency bond markets. “With the exception of the Malaysian ringgit market, project bonds do not feature prominently as an asset class,” says Khoo. “As such, we are aiming to deploy the CGIF’s guarantee to introduce project bonds to local bond investors with a combination of guaranteed tranches and stand-alone tranches to give comfort to investors that the total financing structure is sufficiently robust. Our involvement as guarantors may also allow for the CGIF to assist with the monitoring of projects’ progress and managing bondholder consents.”
He adds, “In many of the region’s economies, there is a dearth of long-term local currency investment opportunities, acting as a key constraint for investors from the insurance and pension sectors. As these are typically conservative investors, developing project bonds as a low-risk asset class is critical for the longer term. As such, projects and their bonds need to be well structured with sufficient debt servicing buffers to bring the risk and the associated premiums down.”
The way forward
To meet the requirement of infrastructure financing, it is imperative that financial markets are developed and tapped to their full potential. In particular, long-term sources of finance, such as bonds, and insurance and pension funds, may be tapped for sustainable and efficient financing of infrastructure projects. Governments have a key role to play in building investor confidence. The success of financial markets will also depend on the concerted efforts of private players and international agencies. Besides financing infrastructure projects, such markets will also put the region on a higher growth trajectory.
