Moody's: Most high-yield corporates in South and Southeast Asia can withstand sustained US dollar appreciation
Moody's Investors Service says that funding diversity and a robust project pipeline that is mobilized by concerted efforts from policymakers and multilateral development banks (MDBs) are necessary to meet Asia's large infrastructure financing needs. In particular, increased participation by institutional investors -- in view of their long investment horizons -- could enhance funding diversity.
"Because institutional investors are ideally suited to providing longer-tenor debt, which matches the relatively long life of infrastructure assets, this channel of long-term financing can enhance funding diversity by supplementing bank debt and government funding", says Terry Fanous, Moody's Managing Director for Project and Infrastructure Finance in Asia Pacific (ex-Japan).
At the same time, the emergence of a robust pipeline of well-structured and investable infrastructure projects is needed to create a virtuous circle that absorbs the incremental financing provided by institutional investors, while reinforcing familiarity with the asset class in Asia, thus incentivizing such investors to commit more capital and build further sector expertise.
"In Europe, substantial long-term debt capacity has been successfully mobilized from institutional investors to finance well-structured infrastructure projects, some of which benefitted from credit enhancements, such as subordinated credit facilities provided by the European Investment Bank", says Andrew Davison, a Moody's Senior Vice President.
"Similarly, a transparent pipeline of projects with appropriate risk allocation and credit enhancement where necessary, would align investment opportunities in Asia with investable parameters for institutional investors", adds Davison.
"Over time, we envisage that Asia's infrastructure needs will drive innovation in long-term funding from the capital markets as the infrastructure asset class becomes more familiar to a wide range of investors", says Fanous. "The process has already started with corporate-bond issuance by state-owned infrastructure companies, such as State Grid in China and the Pelindo port companies in Indonesia. We expect brownfield expansion projects and greenfield credit-enhanced structures to evolve next, and over the longer term, viable funding approaches for uncovered greenfield projects" adds Fanous.
In this environment, policymakers and MDBs play a pivotal role in catalyzing private capital. The role of MDBs in funding infrastructure projects, which historically have been their main focus, is highly visible in countries across all regions and income levels. However, recent research from Moody's "Global Funding From Multilateral Development Banks Will Continue To Increase", (September 2015) shows that significant disparities exist in the regional allocation of MDB resources and concludes that the creation of new multilateral lenders, such as the Asian Infrastructure Investment Bank (AIIB), is a welcome development for potential borrowers in Asia.
Moody's notes that the catalytic role of MDBs manifests itself in bothdirect lending for infrastructure and in the development of well-structured projects.
For example, the World Bank's Global Infrastructure Facility is a platform that facilitates the preparation and structuring of complex infrastructure private public partnerships (PPPs) for the purpose of mobilizing capital from the private sector and institutional investors. The Global Infrastructure Facility also operates across MDBs, private-sector investors and financiers, and policy makers interested in infrastructure investment in emerging markets.
Moody's further notes that China's One Belt, One Road initiative entails massive infrastructure investment. While new institutions such as the AIIB will represent a new source of finance, the region will require funding much greater than the AIIB's $100 billion in authorized share capital to realize the plan's ambitious infrastructure goals. This situation opens a window of opportunity for collaboration with other MDBs and institutional investors which will benefit from the Chinese initiative.
Moody's is observing an increasing level of interest among stakeholders and market participants in the provision of credit enhancements to facilitate the entry of institutional investors into infrastructure finance in Asia. Moody's notes that many institutional investors currently have limited ability to assess credit risk for infrastructure assets in Asia, due to the diversity of regulatory, political and socio-economic environments and the esoteric nature of infrastructure investment.
"Credit ratings and research promote market liquidity and innovation because they are a readily available and globally comparable point of reference and are capable of encouraging a deeper understanding of credit risk in the infrastructure sector", says Fanous.
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