Financing Infrastructure Through Fixed Income Capital Markets in Asia-Pacific Region

Transcription

1 2015/FMP/WKSP2/019 Session 4.3 Financing Infrastructure Through Fixed Income Capital Markets in Asia-Pacific Region Submitted by: World Bank Workshop on Infrastructure Financing and Capital Market Development Iloilo, Philippines July 2015

2 Financing Infrastructure through Fixed Income Capital Markets in Asia-Pacific Region Nataliya Mylenko Finance & Markets World Bank Group

3 Demand Side In many countries a large and growing infrastructure gap is a key constraint on economic growth. Governments, in both developed and emerging markets, are facing budget constraints in an attempt to contain or reduce public debt. Banks around the world are trying to reduce their leverage and increase their liquidity. As a result there is a global trend to seek private financing through capital markets for infrastructure projects that were traditionally financed primarily by governments and banks. 2

4 Supply Side Globally pension fund & insurance company assets were over US$ 13 trillion in EM pension fund & insurance company assets are growing very rapidly. EM pension assets at US$1.8 trillion in 2011 EM insurance assets at US$3 trillion in 2011 While these funds are financing infrastructure indirectly via government debt there is currently little direct investment in infrastructure. Title of Presentation 3

5 Typical Infrastructure Project Balance Sheet Assets $500 mn Infrastructure Physical Assets & Cash Accounts Concession Agreement/ Off-Take Contracts Liabilities $200 mn Senior Debt $200 mn Subordinated Mezzanine Debt $100 mn Equity Senior Debt has first lien on assets, is rated higher than mezzanine debt but has lower returns, and is purchased by most risk adverse of investors (such as pension funds and insurance companies) Mezzanine Debt has second lien on assets and is purchased by sponsoring Government, IFIs, infrastructure debt funds & other higher risk fixed income investors Equity gets dividends only if debt covenants are met and is provided by project sponsors/ operators and strategic investors, private equity and venture funds, IFIs & other equity investors seeking uncapped up-side returns Debt can be in the form of loans or bonds or loans during the construction phase refinanced with bonds after construction is completed. Often equity is reduced & debt increased after construction is completed to provide more leverage to equity investors. 4

6 Most promising approach today is initial medium-term financing by banks followed by take-out financing with longterm bonds Construction Phase Ramp-Up Phase Operation Phase High risks Negative cash flow, loss period Bond financing unlikely Lower risks Cash flow remains small, profitability low Little change of success for straightforward bond financing Low risks Cash flow positive, good record of profitability Better chance for bond financing; but funding is less critical 5

7 Conditions Needed for Domestic Project Bond Market Financing Sufficient capital available outside the banking system (especially in life insurance companies and professionally managed pension funds) Tax and commercial policies that create a level playing field between bank debt and bonds Adequate project specific risk mitigation (credit enhancement) Long-term government debt yield curve to use as a basis for pricing project bonds Legal framework supporting securitization 6

8 Bond markets in emerging Asia are relatively small CN CN HK HK ID ID KR KR MY MY PH PH SG SG TH TH VN VN Government (in %GDP) 2000 Corporate (in %GDP) 2000 Government (in %GDP) 2015 Corporate (in %GDP)

9 IOSCO APRC roadmap Regulatory capacity building in the region Strengthening regional cross-border regulatory cooperation Collectively addressing the impact on Asia Pacific arising from extraterritoriality from European and US financial reform initiatives Strengthening Asia Pacific s capital markets 8

10 Summary Enhancing overall supervisory framework and capacity for capital markets oversight as a long term objective Sharing experience on innovative structures for infrastructure finance and underlying framework for financial structures/instruments. Capacity building for supervisors in close coordination with banking supervisors with the focus on enabling financial infrastructure solutions through bank & non-bank channels. 9

11 World Bank Group Nataliya Mylenko East Asia and Pacific Region