Asian investors show growing appetite for infra debt diversity

Greater funding diversity is attracting more Asian investors as infrastructure debt evolves in the region, according to a report by Moody’s Investors Services.

Several key capital market transactions over the past 12 months, including two project bonds in Indonesia and a green bond, have highlighted the continued growth of infrastructure investment in Asia, the ratings agency said.

“[Paiton Energy Project Bond, Jasa Marga Komodo Bond and Sindicatum Guaranteed Green Bond] were very well received by the market, indicating institutional investors are attracted to Asian infrastructure issuances, even those with long-term amortising debt features or which are denominated in local currency,” said Ray Tay, a senior credit officer at Moody’s and one of the report’s authors.

The $2 billion Paiton Energy bond, the first offshore project bond in Asia in more than a decade, was cited by Tay as why such transactions are significant.

“What is quite amazing is that project bonds have been a more common instrument in Europe and North America but less so in Asia. However, the subscription figures in the recent transactions suggest that Asian investors are already comfortable with investing in long tenor amortising project bonds in the region,” Tay told Infrastructure Investor. “It shows the strong demand from Asian investors for those papers.”

Traditionally, corporate bonds have been a major source of debt funding for infrastructure in the region, while most project finance debt was in the form of bank loans.

Favourable investor appetite, supported by government policies and constraints on bank lending, is likely to lead to more corporate and project bond issuance, said Moody’s analysts in the report. Increased dealflow will also enhance local investors’ exposure to the asset class and see more innovation in funding structure and different forms of credit enhancement, they added.

What happens next will partly depend on how Asian governments and multilateral development banks can unlock the pipeline of financeable projects and match the appetite of long-term institutional investors for long tenor debt, noted Tay. Asia needs to invest $1.7 trillion per year from 2016 to 2030 in infrastructure to meet the region’s needs, according to the Asian Development Bank.

Brownfield expansion projects and credit-enhanced greenfield structures would be attractive to institutional investors as more of them become familiar with the sectors, noted the ratings agency.

Despite a strong appetite for Asian infrastructure debt, investors may hold concerns over construction, demand and political risks, as well as changing regulatory frameworks and currency mismatches.

“As the market matures, we expect investors to take on greater or different kinds of credit risks,” said Moody’s analysts, adding that more greenfield exposures in general can be expected.