Clifford Capital, AIIB create Asian infra debt platform

The Asian Infrastructure Investment Bank has partnered with Clifford Capital, a project finance company backed by the government of Singapore, to establish an infrastructure debt platform to help Asia “catch up” with the US and Europe.

Speaking to Infrastructure Investor, the AIIB’s principal investment officer, capital markets, Stefen Shin said the multilateral organisation was backing Bayfront Infrastructure Management to help mobilise a pool of institutional investors that can finance infrastructure projects in Asian emerging economies in a systematic way.

AIIB has taken a 30 percent stake in Bayfront, with Singapore government-backed Clifford Capital taking the remaining 70 percent. The two partners have together committed equity of $180 million to the platform. The business is to be further capitalised with $1.8 billion in debt issuance capacity guaranteed by the Singapore government.

Shin said that Bayfront’s model builds on a one-off special-purpose vehicle that was designed and structured by Clifford Capital in 2018. That vehicle acquired loans to brownfield infrastructure projects from five banks – DBS, HSBC, MUFG, SMBC and Standard Chartered – and simultaneously issued approximately $400 million of securitisation notes to the institutional market in what it called an infrastructure take-out facility.

This effectively facilitated the transfer of those loans from banks to institutional investors, thus allowing banks to recycle capital and issue new loans.

“Once Clifford Capital had done this proof-of-concept transaction, it realised that it could not be a one-off thing,” Shin said. “It took them about a year to collect 40 or so different loans [from banks], then a couple of months to securitise it and find investors – so they realised that to [accelerate] development of this market, they needed to put in something more permanent, a company that is in the business of, every year, all the time, purchasing brownfield assets and doing a collateralised loan obligation probably once a year.”

Shin said that having a platform company like Bayfront to continually acquire loans and issue securities would allow Asian banks to shift to an originate-and-distribute model for infrastructure financing, as banks in the US and western Europe have already done.

Bayfront would also create a “warehouse” for the loans, Shin said, to alleviate the fact that Asia’s loan markets are less liquid than those of more economically developed regions.

“In Asia it doesn’t take two weeks [to do a collateralised loan obligations deal], it takes six months. So, you need to have a big warehouse for the loans,” he said.

The previous one-off transaction in 2018 saw four different types of investors participate: pension funds, endowment funds, and insurance companies (39 percent); bank treasuries (33 percent); asset managers (21 percent); and private banks (7 percent).

Shin said he expects a similar profile of investors to participate in future issuances from Bayfront, with the first CLO expected to be issued by Q1 2021, and possibly before the end of 2020.

“If you look at that breakdown, they’re really all institutional investors,” he said. “So, we’re executing the plan, which is to get good infrastructure project finance loans into the hands of institutional investors as asset-backed securities.”

Shin added that there are currently 20 banks operating in the region that have expressed an interest in contributing to the Bayfront portfolio and that the recurring nature of the platform would mitigate the problem of adverse selection.

“If we had a single CLO, that problem is a big one, because we don’t know when we’ll do the next one and I don’t know if you’re going to sell me the bad loans or the good ones,” he said. “But because now we have a company and every year you and your competitors are going to be contributing assets, if you start sending us bad ones, we’ll just not buy from you anymore. They have an incentive to keep working in partnership.”

Shin said Bayfront will also stipulate that the originating banks retain 30-40 percent of any given loan to ensure they keep “skin in the game”, thus ensuring that the portfolio will be representative of the banks’ overall lending. Bayfront itself will also invest in the equity tranches or vertical slices of its securitisation issuances to demonstrate alignment with investors.

The vehicle has no country or sector targets when it comes to the types of asset loans it will target, though it does have concentration limits by country, issuer and loan maturity.

Bayfront Infrastructure Management will be operational in January 2020 and will be led by chief executive Premod Thomas, previously head of corporate strategy at Clifford Capital.