June 8, 2018 / 10:15 AM / 10 days ago

Singapore readies first infra CLO

* Structured Finance: Project finance securitisation to target institutional investors

By Sharon Klyne and Prakash Chakravarti

SYDNEY/HONG KONG, June 8 (TRLPC) - Singapore is preparing to launching a collateralised loan obligation (CLO) consisting of dozens of project financings across Asia Pacific in a bid to boost institutional investment in Asian infrastructure.

According to a banker familiar with the matter, several key project finance banks have transferred assets totalling slightly under US$500m into the pool to kick-start the CLO fund, which is denominated in US dollars.

Monetary Authority of Singapore chief Ravi Menon said last week at Nomura's Investment Forum Asia conference that the central bank was working with industry partners on a securitisation of brownfield project finance loans.

The CLO will be targeted at institutional investors, including insurance companies and pension funds. MAS declined to provide further details, while its financial adviser Clifford Capital declined to comment.

The banker familiar with the matter, however, said the fund would consist of 37 project loans spread across a range of industries including energy, liquid natural gas, transport and resources. One fifth of the assets are from Australia, another 14% each from Indonesia and Vietnam and the balance from other countries including Singapore and Oman.

The fund is to be split into different tranches of varying credit profiles with the top-ranking AA1 piece comprising loans provided by various export credit agencies.

The move is designed to boost and diversify Asian infrastructure financing, 90% of which is currently provided by governments.

COMPLEX CHOICES

Some bankers questioned the need for such a fund given that Asia's project financing sector lacked commercially bankable projects for international sponsors and financiers, rather than liquidity.

“We don’t think financing is the problem. It is bankable projects in the space,” said a senior project financier.

Other market participants welcomed the initiative, but highlighted potential challenges, including the region's disparate economies, markets and legal systems.

“It is a good step, but an ambitious and a tall ask. A CLO comprising purely of project finance loans is certainly quite challenging in the diverse markets in Asia,” a senior loan banker at an international bank said.

Project financing loans in the same sector are often structured differently to reflect diverse jurisdictions, which could be a hurdle for the pan-regional CLO.

Securing the correct mix of project loans for the CLO will be more challenging than structuring a CLO comprising plan vanilla corporate loans, bankers said.

“Brownfield assets differ from country to country. A power plant in Vietnam is a completely different proposition to its counterpart in Singapore,” a Singapore-based project finance banker said.

Project financing loans carry longer tenors than corporate loans, are often tailored to specific situations and can cross multiple jurisdictions due to the involvement of borrowers, off-takers and other counterparties, which attracts greater legal scrutiny.

Some of the project loans have export credit agency guarantees or other enhancements and can be priced tightly for the risk with margins of less than 200bp over Libor.

“The challenge for managers would be to dissect the returns for investors with varying risk-return considerations in the pool,” the project financing banker said.

“Cherry-picking the right assets that are simple and uncomplicated is the key to structuring the CLO well,” he added. KICKSTART MARKET

CLO funds are the biggest buyers of leveraged loans in the US and EMEA, but the product has yet to get off the ground in Asia. A successful issue by Singapore could kickstart reigonal demand.

Hong Kong-based credit trading firm SC Lowy and Singapore’s UOB Asset Management dropped plans for a US$400m Asian CLO in April due to low demand despite a two-year marketing blitz to investors in the US, Asia and London.

The deal would have been the first actively managed cashflow CLO to be entirely backed by Asian loans.

The US$358m deal and consisted of multiple debt tranches with different ratings, including an equity tranche of around US$42m, which was expected to yield returns in the high teens.

Governments and multilateral agencies have had some success attracting investors to infrastructure financing. In 2017, the International Finance Corp raised US$1.1bn for its infrastructure-focussed managed co-lending portfolio programme, known as MCPP Infrastructure.

Allianz Group and Eastspring Investments, the Asian asset management business of UK insurer Prudential provided the funding.

Recent project-related bond issues have also revealed global demand for infrastructure assets, notably a US$580m 15-year non-call eight secured Green bond from Indonesian geothermal power producer Star Energy in April. Paiton Energy, another Indonesian power producer, sold US$2bn of 13-year amortising bonds last August.

Despite the focus on developing the sector, Asian institutional investors have been slow to support infrastructure debt financings.

“Asian insurance companies and pension funds are not as savvy as their counterparts in the US. Project finance bonds for brownfield assets have been few and far between, so a project finance CLO is going to take longer to see the light of the day,” another project finance banker said.

YEARS OF PLANNING

The MAS has been working on a fund focussed on infrastructure since 2015, when Singapore's Deputy Prime Minister Tharman Shanmugaratnam mentioned it at the 2015 World Bank-Singapore Infrastructure Finance Summit.

Menon then discussed an infrastructure debt takeout facility in September 2016, which the MAS has confirmed is the same initiative as the current infrastructure CLO.

The infrastructure debt takeout facility described in 2016 was designed to “enhance banks’ ability to originate, arrange and provide infrastructure project financing and at the same time make it easier for institutional investors to invest in long-term infrastructure debt instruments as an asset class”. (Reporting By Sharon Klyne and Prakash Chakravarti; additional reporting by Kit Yin Boey in Singapore; Editing by Tessa Walsh and Steve Garton)

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