Bayfront – Asia’s PF loan securitisation
There has been growing interest among institutional investors in the infrastructure sector, as infrastructure investments can deliver predictable long-term cashflows and show a low correlation with other investments. By Premod Thomas,Audra Low, Nicholas Tan andTed Low of Clifford Capital Pte Ltd.
There has been growing interest among institutional investors in the infrastructure sector, as infrastructure investments can deliver predictable long-term cashflows and show a low correlation with other investments. However, institutional participation in infrastructure funding in Asia is still in its infancy, as investors continue to prioritise developed markets over developing markets, which make up most of Asia.
It is therefore not surprising that infrastructure financing in Asia is still very much the domain of commercial banks, export credit agencies and multilateral financial institutions. However, with banks facing increasing balance sheet and capital constraints brought about by Basel III, the availability of long-dated funding for infrastructure in Asia could come into question unless a new source of capital emerges.
Against the backdrop of these converging trends, Bayfront Infrastructure Capital (BIC) was established as part of the creation of an infrastructure take-out facility (TOF), designed and structured by Clifford Capital with the twin objectives of mobilising institutional capital for infrastructure debt in Asia while providing commercial banks with an avenue to recycle their balance sheet and make room to finance new greenfield infrastructure projects.
In this article, the Clifford Capital team aims to provide an overview of the transaction, the various roles played by Clifford Capital and the marketing efforts leading to a successful launch of BIC in July 2018.
The TOF value proposition
The TOF has been designed to provide investors with credit-enhanced exposure to a diversified portfolio of project and infrastructure loans across multiple geographies and sectors. It acts as a bridge between commercial banks and institutional investors, providing the latter with unique access to an asset class that is not readily accessible otherwise.
The key highlights of BIC are as follows:
* Landmark financing in the infrastructure sector – BIC’s offering represents the first ever securitisation of a diverse, seasoned portfolio of 37 project finance and infrastructure loans in respect of 30 infrastructure projects across Asia-Pacific and the Middle East;
* Mobilising new source of liquidity into infrastructure financing – Through BIC, institutional investors are able to get access to Asian infrastructure debt through a credit-enhanced structure. At the same time, the take-out by BIC allows commercial banks to recycle their balance sheet prior to loan maturity, thereby creating additional headroom for banks to continue doing what they do best, which is to originate and structure new long-term greenfield project finance and infrastructure loans;
* Leveraging the expertise and domain knowledge of existing players – A key challenge for many investors looking at Asian infrastructure is a lack of familiarity with local jurisdictions and regulatory frameworks, market dynamics and the types of project level credit enhancements that are typically utilised to address key risks. With the TOF, investors can leverage on the domain knowledge of the banks that structured the deal originally and also that of Clifford Capital as manager of the portfolio.
* Development of the infrastructure financing market – BIC and the TOF are part of a broader initiative of the Monetary Authority of Singapore to promote the development of institutional capital markets as an alternative capital source for infrastructure finance.
In the maiden transaction under the TOF, BIC issued four classes of collateralised loan notes – Class A, B, C and subordinated notes – amounting to a total of US$458m. The Class A, B and C notes were rated investment grade by Moody’s, fully distributed to institutional investors and listed on the Singapore Exchange (SGX-ST).
The subordinated notes, which represent 10% of the issuance, are solely held by Clifford Capital. This ensures alignment of interest between Clifford Capital as the manager of BIC and the BIC investors, effectively providing BIC investors with first loss protection and helping to underpin the credit rating of the rated notes.
The notes are secured against a pre-assembled portfolio of 37 project finance and infrastructure loans to borrowers in Asia-Pacific and the Middle East.
These loans are used to fund 30 infrastructure projects located in 16 countries across the Asia-Pacific and Middle East regions and spread among eight industry sub-sectors, including power and utilities, oil and gas infrastructure, metals and mining, and transportation.
The portfolio constructed reflects the recent geographical and sectoral activity in the infrastructure and project finance industry across Asia-Pacific and the Middle East.
The 30 projects typically feature stable and predictable long-term cashflows, including through offtake agreements entered with reputable and creditworthy counterparties including major global corporates, state-owned enterprises and government or government-linked sponsors.
More than 30% of the portfolio benefits from credit enhancement provided by export credit agencies and multilateral financial institutions. All loans have a floating interest rate and are denominated in US dollars, providing a natural hedge against the US-dollar denominated, floating-rate Class A, B and C Notes.
Key transaction parties
An overall schematic of BIC and all the parties involved in the transaction is shown in Figure 1. BIC’s issuance was managed by joint lead managers Citibank and Standard Chartered, and supported by five leading Asian project finance banks – DBS, HSBC, MUFG, SMBC and Standard Chartered. Each of these banks, along with Clifford Capital, contributed their assets to form the BIC portfolio.
Marketing and distribution of the CLO
As a new asset class and the first project finance CLO issued out of Asia-Pacific, a comprehensive and strategic investor education process was undertaken.
Multiple non-deal roadshows and teleconferences were conducted across Asia-Pacific (Singapore, Hong Kong, Japan, South Korea, Philippines, Australia and New Zealand), Europe and the Middle East. This resulted in significant oversubscription across all note classes from 25 different investors.
Eventually, 39% of the rated notes were placed with insurance companies, pension funds and endowments, 33% with bank treasuries, 21% with asset managers and 7% with private banks. As a Reg-S issuance, 65% of the investors were from APAC, 23% from Europe and 12% from the Middle East.
In developing the TOF with the inaugural issuance by BIC, Clifford Capital has sought to fulfil several strategic objectives, including (a) addressing Asia-Pacific’s infrastructure financing gap by mobilising a new pool of institutional capital, (b) unlocking additional capital for Asia-Pacific infrastructure financing through facilitating capital recycling by banks, (c) creating a new asset class for institutional investors to access project and infrastructure loans in Asia-Pacific and the Middle East regions in a credit-enhanced structure, and (d) addressing existing market frictions that prevent large-scale mobilisation of institutional capital for infrastructure financings, thereby facilitating institutional participation in the project finance asset class in a readily accessible manner.
In the longer term, Clifford Capital is looking to expand on the TOF model to include a take-out eligibility framework, warehousing facility and distribution platforms as illustrated below. This is aimed at ensuring a smoother and more efficient take-out of project finance loans from commercial banks with the view of building a strong pipeline of transactions for future CLO issuances similar to BIC.
The successful launch of TOF in July 2018 is testament to the demand for such an asset class in the market and Clifford Capital looks forward to partnering with financial institutions to make the project finance asset class a mainstay in the institutional investment marketplace and thereby unlocking additional liquidity into financing infrastructure projects in the region.