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Clifford Capital prices Asia's first project-financing portfolio


IT has been more than three years of conceptualising and structuring, and finally, the product is ready.

Temasek-backed Clifford Capital on Wednesday said it has successfully priced Asia's first infrastructure project finance securitisation, with an issue size of US$458 million.

Bayfront Infrastructure Capital, a special-purpose vehicle sponsored by Clifford Capital, has pre-assembled and securitised a portfolio of 37 infrastructure loans across 30 projects from 16 countries in the Asia-Pacific and the Middle East.

The project finance loans were sourced from five banks: DBS Bank, Hongkong and Shanghai Banking Corporation (HSBC), MUFG Bank, Sumitomo Mitsui Banking Corporation and Standard Chartered.

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In an interview with The Business Times, Clifford Capital chief executive Clive Kerner said the issuance was met with strong demand from institutional investors, including insurers, asset managers, pension funds, endowment funds and bank treasuries.

These investors are new in the project and infrastructure finance space, which in Asia has mostly been dominated by commercial banks, export credit agencies and multilateral agencies like the World Bank and the Asian Development Bank.

Work on creating the instrument had started in 2015, around the time Deputy Prime Minister Tharman Shanmugaratnam said at the World Bank-Singapore Infrastructure Finance Summit that Singapore wants to develop infrastructure debt as a thicker segment of the broader infrastructure asset class, in line with other initiatives that the country is undertaking to become an infrastructure financing hub for the region.

These plans were subsequently spelt out again in the financial services industry transformation map unveiled last year by the government.

The timing is perfect, given growing demand for infrastructure financing in the region - a burden most governments are unable to shoulder single-handedly - and the looming deadline for compliance with Basel III guidelines next year, which will further tighten financing as more stringent standards on capital reserves kick in for banks.

The good news is that once the construction phase of an infrastructure project is completed and the asset starts to generate stable cashflow, it becomes a viable investment for institutions that are looking for long-dated investments that match their long-dated liabilities.

Most of the underlying projects in the loans assembled in this facility are either already operational or close to being operational. By bundling these loans into an instrument that is rated by Moody's, Clifford Capital thus turned it into a palatable instrument for private investors.

In all, four classes of notes were issued. Three classes of investment-grade rated notes (Classes A, B and C) were offered to institutional investors and will be listed on the Singapore Exchange. Clifford Capital will take a subordinated 10-per-cent first-loss piece of the capital structure, which it will hold to maturity.

Explaining the implication of this, Mr Kerner said: "So, if there are problems with the underlying asset, if there are defaults, the subordinated notes will suffer first, then the Class C notes, then Class B. For Class A investors to suffer, effectively 30 per cent of the portfolio has to default."

This is a key selling point of the transaction, he added. "We are very conscious that we need to align ourselves with the investors. The investors take a lot of comfort that we are the primary investors in the subordinated notes, because we take the first loss and they are coming into this transaction knowing that all the credit work and analysis has been done by us."

According to Moody's research, the 10-year cumulative default rate for Asia project finance loans is about 8.8 per cent, comparable with North America, where default rates are about 7.8 per cent.

Recovery rates - the odds of getting one's money back in cases of default - are 78 per cent in Asia and almost 100 per cent in the Middle East, compared to the global average of 79.3 per cent for infrastructure project financing loans.

This maiden infrastructure take-out facility won't be the last for Clifford Capital; it plans to build this into a programme, with new, perhaps larger, issuances in the future.

In a statement, Alan Yeo, executive director and head of financial markets development at the Monetary Authority of Singapore, called this "a good example of how infrastructure can be developed as a mainstream, investible asset class to help crowd in institutional capital."

Clifford Capital is the sponsor and manager for the take-out-facility, while Citigroup and Standard Chartered are joint global coordinators; DBS, HSBC, SMBC Nikko Capital Markets and MUFG Securities are joint book runners and lead managers.


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