AIIB mulls new debt funding initiative to lure asset owners

The China-based multilateral bank could refinance its brownfield infrastructure projects in the capital markets, giving institutional investors infrastructure-linked assets to invest into.
AIIB mulls new debt funding initiative to lure asset owners

When it comes to infrastructure investing, asset owners typically like instruments linked to brownfield projects and shun greenfield ones.

To cater to that preference, the Asian Infrastructure Investment Bank (AIIB) is planning a new practice that allows institutional investors to take up its projects' debt once they reach the brownfield phase, while recycling the money back into new greenfield projects.

Najeeb Haider, principal strategy officer of the China-led multilateral bank, told AsianInvestor that once the China-based multi-lateral lender's infrastructure projects are completed and generating cash flows, AIIB could have them issue bonds targeted at institutional investors.

“One of our priorities is to mobilise private capital for [infrastructure] financing,” Haider said. “So as long as we can mobilise private capital by using our balance sheet effectively, we’re happy to do that.”

Greenfield projects refer to initiatives that have to be designed and constructed, while brownfield projects have already been built and can generate revenues. Haider did not offer an estimate of when the first debt issues from such projects would become available.

Capital recycling would greatly help to support infrastructure financing in Asia, Vivek Rao, a principal financial specialist at the Asian Development Bank (ADB), agreed.

He told AsianInvestor that lenders can best manage infrastructure pre-construction and completion risks, because they have long-term relationship with project sponsors and access to information and security, which is “otherwise not available”.

However, Basel III requirements are set to effectively raise funding costs for commercial banks by between 50 and 110 basis points, making bank loans more expensive, Rao said. So they will need complimentary financing from the capital markets.

Rao said the idea would be for banks to finance infrastructure projects in the pre-completion stage, while “there is opportunity or scope for the institutional investors to play a role” to buy the equity or debt behind a project after it is completed.

Asset owners prefer buying infrastructure debt to making direct greenfield project investments, he said.

AIIB partnership

The plans of AIIB could ensure that it becomes a very active player in the bond markets. The multilateral bank was set up in 2016 to support the building of infrastructure in Asia, but it is still at the early stage of its development. 

To date, AIIB has invested $3 billion in 28 projects, Haider said. The projects cover a broad geographic span, from Southeast Asian countries such as the Philippines and India, to central Asian nations such as Tajikistan and as far west as African states like Egypt. The types of projects also cover a broad array, and include solar plants, natural gas, road construction and railway, according to the bank's website.

Its investments were all conducted in partnership or cooperation with other institutions such as the World Bank, the International Finance Corporation, ADB and the government of India's Andhra Pradesh state.

But while AIIB co-finances with other banks to transact, over time it aims to build its own pipeline and originate its transactions, bringing together institutional investors as part of a lending group, Haider said.

IFC precedent

The IFC, the private sector arm of the World Bank, may well have offered the AIIB a good precedent to expand ways to encourage infrastructure investment: acting as a lead investor, partner, and benchmark.

One example is its Managed Co-Lending Portfolio Programme (MCPP), which aims to raise funding from global institutional investors to modernise infrastructure in emerging markets. MCPP investors passively follow IFC decisions and participate in its loan portfolio. The facility also provides a first-loss tranche of up to 10% of each partner’s portfolio, supported by guarantees from the Swedish International Development Cooperation Agency (Sida).

The programme has attracted money from several investors. China’s State Administration for Foreign Exchange pledged $3 billion in 2013; Allianz Global Investors committed $500 million in October 2016; Eastspring Investments, the Asian asset management business of Prudential, committed $500 million commitment in June this year; and the Hong Kong Monetary Authority, the city’s de-factor central bank, committed $1 billion commitment in September.

Institutional investors “look at the way we deal with risks in emerging markets, which gave them comfort if we continue with the same investment strategy,” Georgina Baker, the IFC’s deputy treasurer and director of syndicated loans and management, told AsianInvestor.

The multilateral also offers investors access to a broad portfolio of projects, so they’re not going to invest in three or five where if one fails that would bring trouble, Baker said. “But if you’re investing in 30 projects, the portfolio of products is broadening and will help mitigate the risk for investors like HKMA."

The story is based on and updated from the Belt and Road feature published on the October/November issue of AsianInvestor magazine.

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