Bankers crossing fingers for infrastructure bond push in Budget

Singapore

SINGAPORE'S infrastructure bond market could be given a boost in the upcoming Budget as Singapore prepares to launch a series of big-ticket infrastructure projects.

This includes green infrastructure such as electric car charging points islandwide as Singapore ramps up its sustainability drive. Already, the government has announced ambitious targets to phase out internal combustion engine vehicles by 2040, and plans to build 60,000 public charging points by 2030.

In the 2018 budget, the government said it would offer guarantees for long-term borrowings by statutory boards and government-owned firms to build national infrastructure.

Now, bankers are hoping that the government will go a step further and offer incentives for project owners to bring more bankable infrastructure projects to the market.

Most market watchers still describe the infrastructure bond space as "quiet". Infrastructure projects are currently largely funded by bank loans. And, while corporate issuers like Sembcorp Industries and Keppel Corp have been active, their bonds are backed by the strength of their balance sheets rather the infrastructure assets they are building.

Edmund Leong, head of group investment banking at United Overseas Bank, said that Singapore-based projects tend to be funded by corporate balance sheets because of the liquidity in the bank loan market and unsecured bond market. "There has not been much appetite for infrastructure bonds here as local bond investors are less comfortable with taking non-recourse risk without a corporate guarantee from sponsors.

"Further, Singapore's unsecured bond market with direct recourse to major borrowers tends to be relatively liquid even in the long end, therefore offering most corporates a good source of financing."

DBS global head of fixed income Clifford Lee added that infrastructure bonds are not a new product, but they haven't taken off because there just hasn't been an adequate supply of plausible and attractive project finance bonds. This fed into a vicious circle: lack of expertise, and lack of investor interest.

That said, the proportion of bonds in the capital mix of infrastructure projects could increase from here, as enhanced capital requirements under Basel III jack up the banks' cost of funding long-tenor project finance loans.

Asked if the provision of guarantees would help to improve investor demand for statutory board bonds, Clifford Lee, head of fixed income at DBS said not necessarily. This is because the Singapore government's triple-A credit rating would bring down the yield of the bond.

"If we can have a project that is in the BBB+ rating range, that would be a real sweet spot, because it is a good enough investment grade to provide adequate credit comfort, but not so much as to bring down the yield."

Another banker, Ian Mathews, executive director, corporate finance at ANZ, added that it would be helpful to have similar efforts to what the central bank has taken to develop green and sustainable financing applied to the infrastructure bond space.

From this year, the Monetary Authority of Singapore has helped to defray expenses that companies incur in validating the green credentials of loans, including the cost of engaging independent sustainability assessors and advisers to develop green frameworks and targets.

This will help to address infrastructure bond issuers' lack of understanding about the instrument, he said. "What will be nice is to have a similar kind of fund available to allow investors to use that capital to employ consultants to help them understand what are the risks they're facing, what the risk allocation is like."

As for where the proceeds of such bond issuances could go to, Timothy Ang, bond analyst at Phillip Securities Research, cited upcoming major public sector projects scheduled to be awarded this year, including various contracts under the Jurong Region MRT Line, the Cross Island MRT Line Phase 1, and the Deep Tunnel Sewerage System Phase 2.

Proceeds could also go towards redevelopment of districts such as the Jurong Lake District, Punggol Digital District and Woodlands North Coast, and rejuvenation of other public infrastructure in mature HDB estates, he said. Last March, the transport ministry said that more than S$60 billion will be invested to expand and renew the rail network over the next 10 years.

The likely issuers therefore include statutory boards such as the Housing & Development Board, Land Transport Authority (LTA) and Public Utilities Board, as well as government-linked companies that have infrastructure capabilities. Government-linked companies with existing corporate bonds include Ascendas and Keppel Land and Surbana Jurong.

Despite the construction slump caused by the Covid-19 pandemic last year, the government has signalled for construction demand to reach S$23 billion to S$28 billion in 2021, up from about S$21.3 billion in 2020. Between S$15 billion and S$18 billion of these projects is expected to come from public sector projects, Mr Ang said.

He added that the government may want to limit tapping its reserves during the pandemic, he said.

For lenders, infrastructure bonds will also provide a wider pool of high-quality and longer-dated SGD fixed income investment to match longer-term SGD liabilities, particularly for long-term investors such as pension funds and insurers.

Mr Leong thinks that as solar power and other green projects become more prevalent in Singapore, sponsors can also consider structuring bond issuances via the securitisation of project cash flows as a potential method of financing such projects.

Already, infrastructure financing platform Bayfront Infrastructure Management, a tie-up between Temasek-backed Clifford Capital and the Asian Infrastructure Investment Bank, has last year inked partnerships with 15 global banks to acquire up to US$600 million of project loans annually, repackaging them as securitised notes, and selling them to institutional investors with a guarantee from the Singapore government.

Sharad Somani, partner, head of infrastructure advisory, Asia Pacific, KPMG in Singapore, noted that infrastructure bonds here are typically denominated in SGD, with a duration of 10 to 20 years, although the LTA has in recent years issued 40-year tenor bonds maturing as far away as 2059 to finance its land transport infrastructure development projects.

Such bonds are usually subscribed by qualified institutional investors, while the retail component is subscribed by qualified bond investors.

The conditions are perfect for bond issuers right now, given the low interest rates and excess liquidity, which has also helped to temper market yield expectations.

Bond yields depend on the quality of the issuer and the potential of the underlying asset cash flow generated, so statutory boards in Singapore are able to issue bonds at rates just slightly higher than the sovereign issuances, at coupons between 3 and 5 per cent, varying with tenor and credit quality.

Private sector players with operating infrastructure projects in Singapore are also able to issue bonds at the lower end of this range.

Mr Somani believes that plenty of private and institutional capital is readily available for green and sustainable infrastructure projects, given the recent upsurge in green and climate change focused funds. Singapore can be a testbed for different modes of financing that can later be replicated in other regional markets to meet the urgent infrastructure financing need there, he said.

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