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.”
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.”
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.
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.”
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.”
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?”