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TRENDS

DEBT

The Asian debt opportunity


Increasing public and corporate debt in Asian markets is likely to have an impact on private
infrastructure investment in the region, writes Siddharth Poddar

he shortfall in infrastructure spending in Asia is a


story that has been told
many times. Infrastructure
demand in the region continues to
outstrip supply and the infrastructure
gap continues to widen year after year,
despite the best efforts of governments
in the region.
Asian economies have grown at rapid
rates over the last decade-and-a-half and
while growth rates in the regions emerging economies have fallen somewhat
over the last two years, they still remain
healthy. Rapid economic growth coupled

FUTURE OF INFRASTRUCTURE

with increased urbanisation and healthy


population growth have all brought the
regions inadequate infrastructure into
sharp focus.
Developing economies in Asia
are faced with major infrastructure
requirements a fact acknowledged
by governments and investors alike
as infrastructure development has not
been able to keep pace with the demand
for infrastructure. Poor infrastructure,
particularly in the form of inadequate
road networks and a shortage of power,
is inhibiting growth in several Asian
economies.

Owing to these factors, there has always


been a role in infrastructure development
for private investors. But Allard Nooy, chief
executive of InfraCo Asia, takes it further:
I think its fair to say that, in certain markets, there has been an increase in private sector appetite. A big part of that
increased appetite comes from another
story beginning to play out in Asian infrastructure: the regions rising levels of debt.
DEBT AS A DRIVER
Compounding the issue for Asian governments has been the increase in debtto-GDP ratios over the last decade-and-

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Economies in the
region are already
faced with fiscal
constraints and
increased public debtto-GDP ratios could
result in a squeezing
out of infrastructure
spending

a-half, particularly since the onset of


the global financial crisis. While public
debt in Asia, barring a few countries,
is relatively low compared to developed
markets, levels of corporate debt have
increased significantly in a few countries.
According to the McKinsey Global
Institute (MGI), public debt in China has
increased from 26 percent of gross domestic
product (GDP) in 2000 to 41.7 percent in
2014. In the same timeframe, public debt
in Japan increased from 129.4 percent of
GDP to 235.5 percent of GDP and in South
Korea it increased from 23.5 percent in 2000
to 47.5 percent in 2014.
China has also witnessed a sharp
increase in its corporate debt-to-GDP
ratio, to 178.3 percent in 2014 from 91.4
percent in 2000. India, where public debt
levels remain low, has seen an increase
in corporate debt from 28.9 percent of
GDP in 2000 to 55.1 percent in 2014.
While debt levels in India remain low
compared to other economies, there are

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sectors in which corporate debt is high.


One of them is Indias infrastructure
companies, which can have an impact
on the development of infrastructure
in India.
According to MGI, government, corporate and household debt amounts to
205 percent of total annual economic
output in Asia a sharp increase from
the 144 percent debt-to-GDP ratio witnessed in Asia in 2007, before the onset
of the global financial crisis.
While increases in household debt do
not necessarily have direct implications
for private investment in infrastructure,
investors will have their eye on rising
levels of corporate and government
debt.
Economies in the region are already
faced with fiscal constraints and
increased public debt-to-GDP ratios
could result in a squeezing out of infrastructure spending. That, in turn, is
likely to be another catalyst for increased
private sector investment in infrastructure in certain Asian markets.
In Europe, for instance, an S&P study
of 16 countries showed that between
2003 and 2012, transport investment
in these countries declined as a result
of increases in overall levels of government debt.
Hans-Martin Aerts, head of infrastructure at APG Asset Management Asia, says:
Many governments in the region have
recognised these constraints and have
committed to structural reforms to provide a better infrastructure investment
framework and this should crowd-in private investment in the sector, hopefully
leading to increased overall spending on
infrastructure development.
Moreover, even those Asian countries
in which public debt is not a concern
just yet are still faced with fiscal constraints, particularly as they have a lot
of catching up to do in terms of spending on healthcare, education, housing
and social welfare. China, for instance,
is faced with an ageing society and its

Hans-Martin Aerts

government is ramping up expenditure


on healthcare and pensions.
Aerts believes that spending in these
areas could catalyse more capital into
infrastructure. Improvements in education and healthcare would trigger more
investments in hard assets, he says. He
goes on to add that infrastructure assets
can play an important role in the portfolio of pension funds, as these investments
are expected to generate long-term, stable
cash flows that match long-dated pension
liabilities. Therefore, a higher contribution to pension programmes could lead
to more investments in infrastructure,
he says.
DEBT AS A CONCERN
While increased public debt is likely
to provide investors with more opportunities to invest in infrastructure,
opinions in relation to high levels of
corporate debt are mixed. Take India,
for instance.

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TRENDS

On the one hand, several of Indias


large infrastructure companies are overleveraged, and as a result, have been
exiting from projects and selling assets.
With the levels of debt in these companies continuing to rise rapidly, a spike
in the number of infrastructure transactions can be expected as more companies sell assets to generate cash flow.
In August, a consortium comprising Brookfield Asset Management and
Core Infrastructure India Fund acquired
six road and three power projects from
Gammon Infrastructure Projects, as the
latter sought to raise funds to repay debt.
But there are also concerns relating to
the high levels of debt Indian infrastructure companies hold in relation to either
investing in these companies or partnering
with them locally.
Andrew Kwok, a Singapore-based
senior vice president in Partners Groups
private infrastructure team, says that the
structure of corporate debt in India
makes it a tough market for investors.
The biggest thing for a foreigner to get
comfortable with is that generally in the
banking market, you cannot fix the rate
of debt. The pension funds, which are
seeking stable yields, would be uncomfortable in India, as you cannot lock-in
the cost of the debt easily.
As such, leverage levels need to be
considered more seriously when compared to a country where the pricing
can be fixed. Kwok says that this may,
however, be changing as we now have
instances of independent power producers doing local note issues at a fixed rate.
In September, Indian independent
power producer ReNew Power Ventures was guaranteed an INR4.5 billion
(63.7 million; $67.8 million) project
bond, the first issue under a $128 million project bond guarantee set up by
the Asian Development Bank and the
India Infrastructure Finance Company.
As momentum builds on that, it will
open more opportunities for foreign
investors. I think the Indian authorities

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are aware of that and they are considering the facilitation of strategies like
dollar tariffs which may pave the way
for dollar lending, he adds.
BANKABLE PROJECTS SCARCE
While governments acknowledge there
is a need for infrastructure investments
to meet rising demand, there is a scarcity
of bankable projects in the region. You
can count the real transactions on your
fingertips, Kwok says.
Aerts agrees. He says there is no lack
of private capital ready to be deployed in
Asian infrastructure and private players
would like to invest more. However, there
is a shortage of good deal flow. Poor project preparation and lack of coordination
seem to be the bottleneck to infrastructure development, he says.
In addition, factors such as regulatory risk and stiff bureaucracy have
been slowing down the implementation
of infrastructure development, he says,
adding that less bureaucracy and better
coordination across various authorities
will lead to more infrastructure projects
getting off the ground.
One of the markets that has been
disappointing in this regard is Indonesia. Investors say that while there have
been all sorts of enabling vehicles to
incentivise private ownership of assets
and private investments, the latter, particularly of foreign origin, have been limited. Nooy says that while the Indonesian
storyline is great, the execution is not
and is faced with many hurdles including
an enormous bureaucracy.
Moreover, pension funds are not willing to take development risk, although
what has changed is that some now are
willing to take construction risk. In
other words, they dont come in the
origination phase and the structuring
stage, but are willing to come in at the
financial close stage and are willing to
take construction risk, he says, adding
that they are available to invest in opportunities with no dividends or cash flows

Governments in
the region have
recognised these
constraints and
have committed to
structural reforms
to provide a better
infrastructure
investment framework
and this should crowdin private investment
Aerts

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I think its fair to


say that, in certain
markets, there has
been an increase
in private sector
appetite Nooy

for two to three years and that is a significant change.


But in the midst of all this, there
are a few bright sparks. Kwok says the
progress made in some markets has
been encouraging. The number of
marquee transactions in the renewables sector is a positive and I think
that theme will continue into the next
year, he says.
WHERE HAVE WE SEEN REAL
CHANGE?
The Philippines public-private partnership (PPP) programme is a bright spot.
Kwok says the Philippines has made
good progress with its PPP programme,
with a number of PPPs already transacted. They have invested in a centralised PPP coordination centre and are
ahead of their peers in developing the
PPP regime, he adds.
Nooy says he is also quite bullish on
the Philippines renewables sector, where
the government has generated an enabling legislation for feed-in tariffs which
has created huge interest from investors.
In September, APG Asset Management
acquired a minority stake in a portfolio of
solar projects in the country. The investment was made alongside the Philippine
Investment Alliance for Infrastructure, a
Macquarie-managed fund dedicated to
infrastructure investment in the Philippines. The portfolio consists of two solar
projects located in Negros Occidental, a
province in the Western Visayas region of
the Philippines, which are expected to be
fully completed in early 2016.
With Indias ambitious targets in the
solar and wind sectors, it is no surprise
that India is being seen as a success story
in recent months, particularly as the government does not have the means to
meet its ambitions on its own. The sector,
among others, has gathered attention
and is seeing private capital flowing in.
In February, Singaporean conglomerate Sembcorp Industries acquired a 60
percent stake in Green Infra, an Indian

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renewable energy company, for $168.5


million. The company says it is looking
to triple its renewable energy portfolio in
the next five years and will mainly target
India and China for growth.
In the larger infrastructure space, last
year, APG Asset Management set up a
joint venture with Piramal Enterprises to
provide mezzanine financing to Indian
infrastructure companies. The joint venture recently concluded a $150 million
investment in GMR Infrastructure, one
of Indias largest diversified infrastructure companies.
PROGRESS MAY BE SLOW, BUT
ITS STILL PROGRESS
For the moment, Asia seems to have
most of the ingredients in place for
greater private investment in infrastructure. Efforts are being made to make
projects more bankable, although progress is slow in this regard.
For instance, another investor says
that he doesnt think there will be any
swift changes over the next 12 months
besides the Philippines and the renewables sector in India. Everyone has been
holding their breath for Indonesia, but
if you said things are going to be freed
up in the next year, I think people would
start laughing at you, he says.
Developments such as the conceptualisation of the China-led Asian Infrastructure Investment Bank could potentially help address this issue. The bank,
which has a war-chest of $100 billion to
support infrastructure development,
could, like other multilaterals, facilitate
the provision of viability gap funding
to make projects commercially viable.
Besides, as one investor says, it also
creates a bit of competitive tension
between the various multilateral agencies, which one expects will have a positive impact on infrastructure development. That should come in handy as
rising debt levels and the regions huge
infrastructure needs drive more projects
to the market. n

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