Despite the lack of appetite for securitization techniques – many bankers blame abuse of securitization as the cause of the credit crunch – Macquarie Korea Infrastructure Fund (MKIF) is successfully pursuing a capital management programme that includes securitising the interest receivables on its infrastructure project portfolio.

The moves are part of an on-going capital management strategy, initially designed to boost profits but now a means to recycle cash that is hard to raise from an illiquid bank market, or bolster short-term debt service on project investments that have been hit hard by the credit crunch rather than going to shareholders for more cash.

The latest MKIF deal – a seven-year securitization programme of subordinate loans provided to Cheonan-Nonsan Expressway Company (CNEC) – is a progression on previous MKIF capital management initiatives

In January 2008 MKIF sold its loan and interest receivables on the Baekyang Tunnel project to BYT Securitization Specialty Company for W172 billion ($134 million), making an investment sales gain of W24.4 billion.

In March 2009 MKIF also signed agreements with Korean financial institutions to divest its W188 billion senior loan commitment to Incheon Bridge Company (IBC). IBC has a 30-year concession on the Incheon Grand Bridge project which is backed by a Korean government minimum revenue guarantee for the first 15 years. Although MKIF has sold its senior loan it remains committed to the project with W74.5 billion of equity and aW89 billion subordinated loan.

The newest MKIF capital management strategy – underwritten by NH Investment Securities Co – securitises MKIF's interest receivables from sub-debt provided to CNEC. The accumulated receivables on the sub-debt were W88.7 billion with an interest rate of 11.58% at 31 December 2008. And the interest rate payable on the debt is 6% from 2005-7, 8% in 2008, 16% from 2009-12 and 20% from 2013-29.

CNEC is concessionaire on the Cheonan-Nonsan Expressway, an 81 km, dual two-lane toll expressway between Cheonan and Nonsan in Korea. MKIF remains as the subordinated debt lender and the major shareholder in CNEC with a 60% equity interest. The project has a 20-year minimum revenue guarantee from the Korean government dating back to 2002, adding significant creditworthiness to the securitization.

The issue – the first tranche of which has closed totalling W30.1 million, split between W24.9 million at 8% and W5.2 million at 8.3% and a slightly longer tenor – will be done through seven different tranches of zero-coupon asset-backed securitised bonds issued by SPVs over the next seven years with a combined face value of W157 billion (see table below for more details). The remaining six tranches will be priced against corporate bond rating plus 170bp-190bp.

MKIF has provided W182 billion of subordinated loans to CNEC. Covenants on CNEC's senior loan defer interest from the sub-debt until the end of 2011. The deal allows MKIF to monetise existing and future accrued deferred interest receivables on the subordinated loan and releases approximately W50 billion of cash in the next two years, which would otherwise have been retained at the CNEC level, and W157 billion of cash to MKIF over the period of the total programme.

The deal demonstrates that while securitization has become almost a dirty word among bankers, asset-backed deals based on forward receivables – particularly those with guarantees – are a still useful tool for portfolio managers, particularly at a time when the debt markets are constrained and raising debt for new projects is both difficult and potentially expensive unless based on a low fixed Libor rate which few, if any, lenders would agree to.

In addition, many infra funds face a difficult debt service period given declining revenues on infrastructure assets because of the recession in trade and therefore transport volume. As Chul Haim Pak, director at Macquarie Shinhan Infrastructure Asset Management, says of the CNEC securitization: "This outcome is very positive as MKIF's capital position will be more sensitive to the performance of newly opening assets over the medium term." For those funds with the type of forward receivables investors will buy into, securitization may be the liquidity lifeline needed in a down market.