Bond investors ‘find Asian infrastructure most attractive’

While interest in the region increases, investable opportunities may become hard to identify due to risk profiles and mandate restrictions, according to a new survey.

Infrastructure is the most attractive investment sector in Asia this year for fixed-income investors, a survey of 178 investors with a combined $849 billion in assets under management, revealed.

Interest in infrastructure has sharply risen, noted Ritesh Maheshwari, managing director and regional head of market outreach at S&P, which conducted the survey in partnership with HSBC. Nearly 80 percent of those polled, plan to increase their exposure to the sector, representing a 15 percent increase compared with the previous survey conducted during the second half of 2017.

“The development and construction of infrastructure projects continues at very strong levels across Asia, excluding Japan,” Richard Langberg, head of infrastructure and utility ratings for Asia-Pacific at S&P told Infrastructure Investor. “We are seeing capital market financings for projects such as ports, airports, toll roads, thermal power plants, wind and solar plants, mass transit and water and wastewater projects among others,” he said.

“While banks continue to provide the bulk of financings for infrastructure, we expect Asian and international long-term investors to increase their exposure over time,” Langberg commented.

“This is due not only to the natural matching of assets and liabilities for longer-term investors, but also the stability and low default risk we see in the infrastructure sector,” he said. “Infrastructure debt performs through economic cycles better than similarly rated non-financial corporate debt.”

Some 91 percent of those surveyed intend to increase their exposure to Asia credit markets over the coming year, given the region accounts for a great proportion of global growth.

However, Langberg noted that “in Asia, investors often have trouble finding deals that match their investment mandates and risk settings”. For example, some institutions are not allowed to participate in greenfield infrastructure projects because of their mandates, while another challenge is the high sovereign risk in countries with infrastructure deficits.

The survey also highlighted that, although China’s Belt and Road Initiative is another driver of infrastructure deals in the region, only 40.1 percent of respondents intend to participate in BRI deals, reflecting a decline from an average 48 percent in the previous three rounds.

“We think investors would also like to see deal structure with a better mix of local versus major currencies and more long-term tranches. Lack of deep, long-tenor hedging options leave only expensive hedging products available to investors,” said Langberg in another credit commentary.

Also, the survey showed that more than a fifth of investors have already invested in green bonds, as the green finance market is rapidly expanding, led by China issuance. The demand for green bonds is likely to increase, noted the survey, while some 61.8 percent of investors plan to increase exposure to the asset class.

“For projects to tap international bond investors, a strong contractual framework with a clear waterfall mechanism becomes a key necessity,” Langberg said.

Since 2016, the survey has collected responses from senior fixed-income portfolio managers every six months.