Private Debt Investor
Singapore backs 10x leverage with Clifford Capital’s new infra debt facility
Adalla Kim

A model by Singapore’s Clifford Capital is the latest capital recycling practice in Asian infrastructure debt.

The Singaporean government has stepped in to fill a gap in the Asian infrastructure financing market.

Bayfront Infrastructure Management, the lending and origination platform set up by Clifford Capital, will launch a loan warehousing vehicle, the platform’s chief executive Premod Thomas has told Private Debt Investor.

The new venture by Clifford – a Singapore-based project finance lending firm part-owned by Temasek Holdings, one of the country’s sovereign wealth funds – will purchase infrastructure and project finance loans primarily made by commercial banks in Asia.

Singapore’s Ministry of Finance is providing a financing guarantee to the platform’s lenders. The government has a AAA rating from international credit rating agencies, according to a disclosure from the Monetary Authority of Singapore.

The leverage could support BIM's special-purpose vehicle raising 10x more senior debt, if there is sufficient equity or junior debt to support the senior debt, according to Kingsley Ong, a Hong Kong-based partner at Eversheds Sutherland.

BIM is finalising its legal documentation process for the loan warehousing facility, which it plans to be operational during the first quarter of 2020. The platform will be able to spend $1.98 billion on US dollar-denominated performing infrastructure loans made by banks across Asia. It plans to combine portfolios of loans from more than 20 international banks into diversified pools.

“[The loan warehousing facility] acts as an intermediary between banks and institutional investors,” said BIM chief operating officer Nicholas Tan. He added that the platform has balance sheet capital and the resources to carry out the acquisition, warehousing and monitoring of loans, and the ability to structure and manage future securitisations.

Ong said that warehousing of loans for securitisation was common in Asia-Pacific. “The originator needs to build up a sufficient pool of loans before it is commercially feasible to employ securitisation to refinance the loans.” He added that examples of asset classes in which pre-securitisation warehousing is used include mortgages, loans to small- and medium-sized enterprises, consumer loans, student loans and auto loans.

It is understood that the take-out facility framework that BIM has adapted typically involves the sale, transfer or entrustment of assets. This is done by an originator into a special-purpose vehicle or trust, which then uses the assets as collateral to issue asset-backed financial products.

Clifford Capital owns a 70 percent equity stake, worth $126 million, in BIM. The Asian Infrastructure Investment Bank holds the remaining 30 percent, worth $54 million, according to company statements.

In July 2018, Clifford Capital finalised its inaugural transaction: a $458 million securitised note issuance. The firm acquired 10 percent of the subordinated notes, sized at $45.8 million. “This could be syndicated down to five percent in future transactions,” said Thomas.

 

Market making

Market observers have noted factors that can deter institutional investment in Asian infrastructure, such as off-take risk, political risk and currency mismatch risk.

“For some projects operating in emerging market countries, the domestic macroeconomic, financial system or political challenges can be significant risk factors,” four sector analysts for infrastructure and project finance at Moody’s wrote in the agency’s September report Infrastructure & Project Finance – Asia Pacific.

Despite this backdrop, the AIIB has been keen to play a role in opening new markets in Asia. The development bank’s report, Asian Infrastructure Finance 2019, mentioned how global institutional investors considered private-public partnership structures to be riskier in Asia-Pacific than in other regions.

 

Offering his view on the scalability of BIM’s activities, which involve acquiring brownfield infrastructure loans and issuing securities against them, Stefen Shin, a Beijing-based principal investment officer for capital markets and structured products in the AIIB’s investment operations department, said : “Currently the market for emerging market infrastructure-backed securities is very small. However, we believe with the creation of BIM, and others like it, the market can be created and scalability can be gradually achieved, and that this can contribute towards bridging the large infrastructure financing gap in Asia.”

According to the latest report from the Asia Securities Industry and Financial Markets’ leveraged finance division, $44.8 billion of leveraged loans were issued in Asia during Q1 2019. The scope of the report excluded the issuance volumes from developed markets, which were defined as Japan, Australia and New Zealand.

The AIIB report also pointed to a decline in the volume of yearly transactions finalised in the syndicated loan markets. It included data from Turkey and Russia to cover transaction figures in the infrastructure sectors across developing Asian countries.

It is understood that the BIM vehicle will look to acquire at least BB-rated credits.

In addition to Temasek, Clifford Capital’s shareholders include DBS Bank, John Hancock Life Insurance, Prudential Assurance Singapore, Standard Chartered, and Sumitomo Mitsui Banking Corporation.

 

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IJGlobal
Asia's first infra loan securitisation platform
David Doré

Clifford Capital and Asian Infrastructure Investment Bank (AIIB) announced last month (November 2019) the establishment of Bayfront Infrastructure Management (BIM) – a platform to mobilise institutional capital for infrastructure debt in Asia. IJGlobal spoke with both equity holders to learn more.

BIM will leverage the learning gained during the marketing and issuance of Asia’s first securitisation of project finance and infrastructure loans, which Clifford Capital affiliate Bayfront Infrastructure Capital (BIC) launched last year (2018).

BIM’s $1.98 billion capitalisation plan will have a debt-to-equity ratio of 91:9 as follows:

• $1.8 billion debt
• $180 million equity
  • Clifford Capital – $126 million (70%)
  • AIIB – $54 million (30%)

“We should think about BIM as a warehousing and distribution platform,” said BIM chief executive Premod Thomas. “It will take out loans from participating banks. BIM will then hold them on its balance sheet, which would effectively serve as a warehousing facility until an adequate quantity amasses, pending their drop-down via distribution platform in subsequent issuances.”

BIM intends to accelerate the time to issuance. BIC took about 18 months.

“We are looking to come to market between 12-15 months after going live in Q1 2020. This would mean we shortened the process by three to six months as a result of the learning of the BIC transaction and issue in Q1 2021,” said Thomas.

Another source put the pace even quicker. They said the first issuance could be in Q4 2020. “It needs to be before December 2020; because that’s a dead period, so maybe November. Or BIM will need to wait until February 2021.”

BIM’s business model comprises three parts:

• take-out eligibility framework
• warehousing facility
• distribution platforms

Richard Desai is BIM's chief risk officer and Nicholas Tan serves as chief operating officer.

 

Take-out eligibility framework

BIM will take-out infrastructure loans from the balance sheet of banks.

“The term take-out facility is evocative of the take-out from the balance sheet of the banks. It was developed between Clifford Capital and our conversations with the Monetary Authority of Singapore (MAS),” said Thomas. “We will probably not use the term take-out facility because that was a generic description of what it was we were seeking to do. We will increasingly use the term bayfront infrastructure.”

Clifford Capital and now BIM have been negotiating take-out agreements with 20 international banks and five development finance institutions.

An important area of the discussions has been on the eligibility framework. Part of the reason BIC took so long, Thomas noted, was that the participating lenders weren’t clear on what loans would be eligible.

“Adverse selection was a big potential problem, with the banks cherry-picking the loans,” said Stefen Shin, AIIB’s principal investment officer of capital markets and structured products. “We realised we needed a well-structured process with the participating banks.”

Thomas, who doubles as Clifford Capital's head of corporate strategy, told IJGlobal that “those understandings are now being baked into MOUs with each of the institutions”.

The BIM chief executive added: “Now we are much clearer about how the loans should look, we are spreading that information across to this larger group. Having a clear take-out eligibility framework will reduce one of the frictions to getting the loans off these banks’ balance sheets onto ours.”

He stressed that beyond loan quality BIM would aim to warehouse a strong diversified portfolio of loans based on industry, geography, structure and pricing. “The greater the diversification, the better the rating of the capital structure,” Thomas argued.

Environmental, social and governance (ESG) considerations will be another factor. Most if not all the participating banks will be in compliance with Equator Principles 3. Thomas underscored that BIM won’t warehouse coal loans.

“This is one of the big areas where AIIB will add value as the newest DFI on the block, which has very high ESG policies and standards,” said Thomas.

Like BIC, BIM’s initial issuances will be in US dollars. “We do, however, have the ability to do a small amount in AUD,” Thomas confirmed, “because Australia is the deepest infrastructure financing market in our region.” BIM won’t get into Yen for the foreseeable future.

This currency constraint will, therefore, preclude most local banks from participating in the beginning, as they don’t do many US dollar deals. “Bank of China and the special drawing rights market are huge,” Shin said, “but they don’t do lots of foreign currency lending.”

 

Warehousing facility

BIM will acquire mostly brownfield project and infrastructure loans from financial institutions, warehouse and manage them.

Shin highlighted the difference between the US and Asia financial markets. “If it was a US deal, you wouldn’t need BIM,” said the former UBS fixed income structuring executive director. “The reason is that the US syndicated loan market is super, super liquid. You can turn around deals quite quick.”

However, in the US mortgage market or Asia infrastructure loan market, Shin continued, the ramp-up period is significant. “You cannot gather $500 million in weeks. It’s impossible.”

“We will build up our book to an adequate size in the warehouse,” said Thomas. Shin alluded to roughly $700 million and then drop down after BIM distributes a portion to institutional investors.

Thomas stressed that BIM’s book is an evolving number capped at $1.98 billion.

Shin likened the process of gathering food in a refrigerator.

“Gather the assets and put it in a big refrigerator and keep it nice and cool,” he told IJGlobal, “until you get a sizeable amount of food in the refrigerator.”

 

Distribution platforms

BIM has an initial target to issue securities every 12-15 months.

“Like BIC, each issuance will likely be $400-600 million, close to the $500 million sweet spot for issuance size,” said Thomas.

The pilot issuance in July 2018 had 25 institutional investors of insurance companies, pension funds, endowments, specialised asset managers from Asia, Europe and the Middle East during book-building with 16 ultimately joining. Thomas estimates those numbers will stay roughly the same for each issuance.

A key difference with BIM, Thomas pointed out, would be he will be marketing to wider set of investors. “We might look at 144A distribution format, which would take us to onshore US. It really depends on the interest we garner as we go wider in our search.”

Like in BIC, BIM will hold 5-10% of the equity on the unrated tranche.

 

Comparables

Deutsche Asset Management subsidiary RREEF America’s $431.3 million managed project finance collateralised debt obligation (CDO) RIN 1 and in-the-works RIN 2 transactions “comes closest to what we did last year” offered Thomas.

AIIB’s Shin suggested Freddie and Fannie Mac.

“Some don’t like this comparison but generally what Freddie and Fannie Mac do for the US mortgage market is say to the mortgage banks, ‘If you have loans that conform with our eligibility criteria, we’ll take it off your books’,” said Shin.

“We’ll build up our book and regularly issue MBSs – or in our case infrastructure asset-backed securities – in the market,” added the AIIB investment officer. “Freddie and Fannie are state-sponsored similar to Clifford Capital since it’s 40% owned by Temasek.”

However, the US mortgage market, and Freddie and Fannie specifically, do not do tranching like CLOs, noted Shin. Yet he stressed the role of Freddie and Fannie is huge.

Thomas also mentioned US alternative asset manager Mariner. It is active in the project finance securitisation space, and generally acquires the unrated, equity tranches, the lowest part of the structure in synthetic securitisation. “These are rough comparisons,” cautioned the BIM chief executive.

“Our business model is the first of its kind in Asia,” emphasised Thomas. “The ability to warehouse loans for an extended period of time is quite unique. Warehousing will benefit from a Singapore Government guarantee.”

 

Challenges

Thomas ticked off seven challenges with BIM’s business.

Continued market friction will be permissions for loan transfer. Different parties, including sponsors, have to consent before the loans move into the warehouse. Thomas highlighted the Asia Pacific Loan Market Association’s work on standardised documentation as a way to mitigate the challenge.

Another obstacle is getting the export credit agencies comfortable with BIM’s business model. “Our aim is to talk with the ECAs," said Thomas, "and perhaps escalate the conversations on a G-to-G basis. Having AIIB join in those conversations will be beneficial.”

A third sore point is the time-consuming process to gain a credit rating for a security’s tranches. BIM, which intends to work with Moody’s, concedes that because it is a new asset class, the pace is understandable. As more transactions occur with these rating agencies, this process will accelerate.

Three other frictions involve the lack of pricing benchmarks, liquidity and research coverage. “We are working on certain pricing benchmarks with the education sector,” alluding to EDHECinfra’s pricing benchmark project.

Investor education is the seventh challenge. “During BIC we spoke with a lot of people,” said Thomas. “As BIM’s message resonates, we intend to approach more and more institutions.”

 

The future?

Infrastructure asset-backed securities are in their very early days, cautioned Shin. One deal doesn’t transform the market. “We need three good deals in a year, then once you get over $1 billion in primary issuances, people then begin to say, ‘Okay, this is interesting’.”

He then provided a buoyant scenario of how the market may evolve.

“If you are a sovereign wealth fund or insurer, you won’t hire a new person or team to cover this new asset class when there’s no massive primary issuance. You can’t get more than some 10% on these deals. You’re not going to set up two or three-person team to buy $50 million of assets a year. That’s not workable.”

A $1 billion primary issuance market means that the asset class is now on institutional investors’ radar.

“Once we cross $2 billion in new issuance, then you have a new market and large players maybe build a two-person team – an analyst and an execution person,” said Shin.

He added: “Then imagine you get a lot of these two-or-three-person teams at different institutional investors. The originating banks would notice and likely hire sales dedicated to this. Go with $200 million for three years; that’s $600 million an investor has gobbled up.

“Then the banks might want to buy and sell a little bit, with investment bankers saying, ‘I need to make a market and take some inventory’. All these things happen slowly in a natural market-building process, however.”

He ends with a pregnant question.

“How fast can we get people to be really interested so that all the players in the market – from sponsors to investment bankers – come to the conclusion that they don’t want to be on the outside looking in?”

 

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Infrastructure Investor
Clifford Capital, AIIB create Asian infra debt platform
Daniel Kemp

The vehicle will be capitalised to the tune of $1.98 billion, with $180 million in equity from the two partners and $1.8 billion in debt issuance capacity guaranteed by the Singapore government.

The Asian Infrastructure Investment Bank has partnered with Clifford Capital, a project finance company backed by the government of Singapore, to establish an infrastructure debt platform to help Asia “catch up” with the US and Europe.

Speaking to Infrastructure Investor, the AIIB’s principal investment officer, capital markets, Stefen Shin said the multilateral organisation was backing Bayfront Infrastructure Management to help mobilise a pool of institutional investors that can finance infrastructure projects in Asian emerging economies in a systematic way.

AIIB has taken a 30 percent stake in Bayfront, with Singapore government-backed Clifford Capital taking the remaining 70 percent. The two partners have together committed equity of $180 million to the platform. The business is to be further capitalised with $1.8 billion in debt issuance capacity guaranteed by the Singapore government.

Shin said that Bayfront’s model builds on a one-off special-purpose vehicle that was designed and structured by Clifford Capital in 2018. That vehicle acquired loans to brownfield infrastructure projects from five banks – DBS, HSBC, MUFG, SMBC and Standard Chartered – and simultaneously issued approximately $400 million of securitisation notes to the institutional market in what it called an infrastructure take-out facility.

This effectively facilitated the transfer of those loans from banks to institutional investors, thus allowing banks to recycle capital and issue new loans.

“Once Clifford Capital had done this proof-of-concept transaction, it realised that it could not be a one-off thing," Shin said. "It took them about a year to collect 40 or so different loans [from banks], then a couple of months to securitise it and find investors – so they realised that to [accelerate] development of this market, they needed to put in something more permanent, a company that is in the business of, every year, all the time, purchasing brownfield assets and doing a collateralised loan obligation probably once a year.”

Shin said that having a platform company like Bayfront to continually acquire loans and issue securities would allow Asian banks to shift to an originate-and-distribute model for infrastructure financing, as banks in the US and western Europe have already done.

Bayfront would also create a “warehouse” for the loans, Shin said, to alleviate the fact that Asia's loan markets are less liquid than those of more economically developed regions.

“In Asia it doesn't take two weeks [to do a collateralised loan obligations deal], it takes six months. So, you need to have a big warehouse for the loans,” he said.

The previous one-off transaction in 2018 saw four different types of investors participate: pension funds, endowment funds, and insurance companies (39 percent); bank treasuries (33 percent); asset managers (21 percent); and private banks (7 percent).

Shin said he expects a similar profile of investors to participate in future issuances from Bayfront, with the first CLO expected to be issued by Q1 2021, and possibly before the end of 2020.

“If you look at that breakdown, they're really all institutional investors,” he said. "So, we’re executing the plan, which is to get good infrastructure project finance loans into the hands of institutional investors as asset-backed securities."

Shin added that there are currently 20 banks operating in the region that have expressed an interest in contributing to the Bayfront portfolio and that the recurring nature of the platform would mitigate the problem of adverse selection.

“If we had a single CLO, that problem is a big one, because we don't know when we'll do the next one and I don't know if you're going to sell me the bad loans or the good ones," he said. "But because now we have a company and every year you and your competitors are going to be contributing assets, if you start sending us bad ones, we'll just not buy from you anymore. They have an incentive to keep working in partnership.”

Shin said Bayfront will also stipulate that the originating banks retain 30-40 percent of any given loan to ensure they keep “skin in the game”, thus ensuring that the portfolio will be representative of the banks’ overall lending. Bayfront itself will also invest in the equity tranches or vertical slices of its securitisation issuances to demonstrate alignment with investors.

The vehicle has no country or sector targets when it comes to the types of asset loans it will target, though it does have concentration limits by country, issuer and loan maturity.

Bayfront Infrastructure Management will be operational in January 2020 and will be led by chief executive Premod Thomas, previously head of corporate strategy at Clifford Capital.

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