Take-off imminent for Asian institutional debt

Allocations to infrastructure debt are rising in the region, with credit enhancement mechanisms set to boost deal flow.

Institutional investors are starting to play a growing role in financing Asian infrastructure as fresh tools give them more confidence to invest in the asset class, according to Moody's.

Allocations to infrastructure debt are rising on the back of investors' rising interest in credit enhancements mechanisms, the rating agency states in a report released today, feeding hopes that a significant barrier to greater institutional involvement in the space is about to be lifted.

Many institutional investors currently have limited ability to assess infrastructure credit risk in Asia, Moody's said, due to the diversity of regulatory, political and socio-economic environments in the region as well as the assets' complexity.

Yet the report reckons the credit quality of infrastructure debt rated by Moody's is more stable over the long term than that of non-financial corporates. 

Another study on the credit performance of unrated project finance bank loans, also produced by the agency, similarly shows that the risk allocation, structural features, underwriting disciplines and incentive mechanisms of project finance assets have delivered a resilient credit performance for investments in non-OECD countries. 

In Europe, Moody's noted, substantial long-term debt capacity has been successfully mobilised from institutional investors to finance well-structured infrastructure projects. Some of them have benefitted from credit enhancements such as subordinated credit facilities provided by the European Investment Bank under its Project Bond Initiative.

In Asia, institutional debt investors have recently participated in bond issuances by state-owned infrastructure groups like China State Grid Corporation, Indonesia's Pelindo Port companies and India's International Delhi Airport. 

“Institutional investors, like pension funds and insurance companies, are ideally suited to providing longer-tenor debt which matches the long life of infrastructure assets,” commented Ray Tay, a Moody's vice president and senior analyst. “Banks have their limitations in lending to individual countries, sectors, or borrowers over a long-term period.”

Moody's therefore expects banks to continue playing a pivotal role in funding projects during their construction and ramp-up phases, with debt capital markets providing the firepower to complete refinancings. 

Tay added: “The enhanced funding diversity shall lead to a higher efficiency in the funding outcome and risk allocation.”