ASIFMA–ICMA

Guide to Infrastructure
Financing in Asia
August 2016

Disclaimer
This “Guide to Infrastructure Financing in Asia” (the “Guide”) is intended for general information only, andis not intended to be and should not be relied upon as being, legal, financial, investment, tax, regulatory,
business or other professional advice. Users of this Guide should seek appropriate independent advice
before entering into any kind of infrastructure financing transaction. While the information containedin this Guide is taken from sources believed to be reliable, neither ASIFMA nor ICMA nor its partners
represents or warrants that it is accurate, suitable or complete and none of ASIFMA, ICMA, its partners
or their respective employees or consultants shall have any liability arising from, or relating to, the use ofthis Guide or its contents.
August 2016

ASIFMA Partners
AIA Group Limited, Allen & Overy LLP, Asian Development Bank (ADB), Asian Infrastructure Investment Bank,
BlackRock, Citi, Clifford Chance LLP, Credit Guarantee & Investment Facility (CGIF), Credit Suisse Group AG, DBS
Bank, Eastspring Investments, Ernst & Young LLP, First State Investments (Hong Kong) Limited, Goldman Sachs
Group, Inc., HSBC, ING Group, International Finance Corporation (IFC), JPMorgan Chase & Co., KPMG Infrastructure
Advisory, Latham & Watkins LLP, Linklaters, Macquarie Group, MetLife Investments Asia Ltd, Moody’s, Norton Rose
Fulbright, Principal Global Investors, LLC, Societe Generale, Standard Chartered Bank, Sun Life Financial Inc., The
World Bank, Thomson Reuters, Westpac Group

AFME/ICMA Working Group:
Allen & Overy, Allianz Global Investors, Arcus Infrastructure Partners, AXA Investment Management, BBVA, Citigroup,
Clifford Chance, Crédit Agricole CIB, Deutsche Bank, J.P. Morgan, Lloyds Banking Group, Moody’s Investors Service,
Natixis, Société Générale CIB, SwissRe.

2

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

Contents

Foreword

4	1. Introduction and executive summary5	2. Overview of the bank loan and project bond markets

8

3. Highlights of ADB, AIIB and IFC 

12	4. Project structures, procurement and planning process

16	5. Debt financing choices: corporate finance or project finance, loan finance or bond finance

21	6. Mechanics of issuance of debt – parties, roles and tasks

26

7. Marketing, pricing and issuance process31

8. Project bond investor base34

9. Key considerations for investors

37

10. Credit enhancement alternatives40

11. Credit review processes

43

12. Disclosure and reporting standards

46

	Appendix A: Examples of Project Finance Transactions in 2015

48

	Appendix B: Indicative Project Bond Financing (only) Timetable and List of Responsibilities*

50

Appendix C: Typical bond and bank documentation

51

	Appendix D: Sample Credit Review Checklist from Banks, Investors and Ratings Agencies

53

	Appendix E: ADB’s credit enhancement for a local currency project bond
– Tiwi-MakBan Case Study

55	Appendix F: CGIF’S CONSTRUCTION PERIOD GUARANTEE

58

Appendix G: Glossary of Terms

60

Appendix H: Further resources

62

Contacts

63

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

3

Foreword

On behalf of ASIFMA and ICMA, we are delighted to introduce this Guide to Infrastructure Financing in Asia. This
Guide is addressed to public authorities, project sponsors, project promoters and issuers seeking to raise finance for
Asia Pacific infrastructure projects. It is designed to provide practical guidance on raising debt finance through banks
and the capital markets, taking account of planning and procurement issues on the transaction process.
The Guide also provides key considerations and emphasises that Asia Pacific infrastructure investments are long term
investments which require consistent and transparent regulatory policy from regulators and public sector authorities.
We would like to thank the members of both the ASIFMA Infrastructure Working Group and the ICMA-AFME
infrastructure Working Group, comprising banks, investors, law firms, rating agencies and other market participants,
for the time and effort they have devoted to creating this Guide, as well as the many public sector organisations who
have contributed their views and advice.

Mark Austen
Chief Executive Officer
Asia Securities Industry & Financial Markets Association
		4

Martin Scheck
Chief Executive
International Capital Market Association

ASIFMA–ICMA Guide to Infrastructure Financing in Asia	1. Introduction and executive summary

This Guide aims to unlock the potential for infrastructure
financing in Asia by informing public sector authorities – asgrantors of various types of public concessions/contracts– first time sponsors and project companies interested inraising debt for infrastructure projects in Asia. In particular,
it focuses on the debt component of financing, rather
than equity (which is outside of the scope of this Guide),and describes the relative merits of the bond markets
and bank financing and particular considerations to betaken into account by public procurement authorities andprivate sector entities, as well as considerations relevant toprocurement and planning. While not primarily written forinvestors, this Guide also sets out key credit considerations
for project bond investors.
The Asian Industry & Financial Markets Association (ASIFMA)1 and the International Capital Market Association (ICMA)2,each of which represents a variety of capital market participants, are committed to supporting the expansion of capital
markets financing for all types of infrastructure projects, in line with the European Commission’s goal of bolstering
economic growth through long-term financing3 and in Asia, aligns with various endeavours to provide and promote
capital markets solutions for infrastructure financing, as more specifically described herein. It is with these goals inmind that ASIFMA and ICMA have produced this Guide.

1.1 Five key considerations
Underlying this Guide are five key considerations that should be taken into account early in the financing andplanning process. The potential assessment and impact of these considerations should ease the path to efficientand competitive financing, while balancing the interests of the relevant parties - vital if the full potential of competitive
private sector financing is to be realised:a. Tailoring of financing choice to project needs: The debt component of infrastructure projects may befinanced in a variety of ways, including by way of the bank loan market, the debt private placement
market and the public institutional investor capital markets. As each market has different inherent features,
they may be more or less suitable for any particular infrastructure project. However, no one particular market isnecessarily optimal for financing infrastructure projects while fulfilling all the project’s requirements, so considerationof the relative merits, and priority weighting, should be given to a variety of influential factors. These include theflexibility to accommodate changes to circumstances over the life of the project, the degree to which the tenors
and interest rate structures offered by each type of financing best suit the requirements of the project’s revenues
and debt profile, the nature of the transaction risk and the risk appetite of the target investors, confidentiality, allin cost effectiveness and economics of the method chosen and consequent value-for-money, all of which are
explored further in this Guide.
For instance, a loan from a small group of relationship banks or a private placement with a small number of investors
may offer flexibility in terms of drawdown schedules, confidentiality and a simple process for amendments andwaivers to the financing terms. A debt private placement or public markets transaction might offer a longer tenor
than a bank loan and, therefore, lower refinancing risk, which could improve the overall economics. The broad
investor base and the visibility offered by a public markets transaction may offer better value-for-money, although
it is potentially more burdensome to make amendments to terms during the life of the transaction.
b. Anticipate likely credit enhancement and any ratings required by lenders or investors: An investment
grade rating helps to broaden the investor base, as many institutional investors have a mandate toinvest in investment grade assets. Public guarantees and/or credit enhancement - partial or full - may
be used to upgrade the rating of a transaction that might otherwise be less acceptable to investors
1
2
3

See further www.asifma.org
See further www.icmagroup.org
http://www.icmagroup.org/assets/documents/Regulatory/Infrastructure-Financing/AFME-ICMA-Guide-to-Infrastructure-Financing-June-2015.pdf

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

5

from a credit risk perspective. However, a balanceneeds to be struck between using guarantees and/or
credit enhancement to improve the quality of projects
that are already investment grade, and deterring or‘crowding-out’ potential bond investors who prefer the
additional yield of an un-enhanced debt product. Credit
enhancement, for example through the Construction
Period Guarantee (CPG)4, of the Credit Guarantee andInvestment Facility (CGIF), can be helpful for projects
that face challenges in long-term financing, or mightotherwise not be financeable at all. CPG is also usefulfor large projects where liquidity may be an issue, andto possibly lower the cost of financing for the project,
thereby enhancing value-for-money.
c. Anticipate the need for usage guarantees: Some transactions are financeable if the usage or demandrisks are either short-term in nature, or alternatively, quantifiable, well-proven and appropriately
assessed and measured. While not guaranteeing the success of a project per se, some transactions may not
be financeable without some level of public sector usage guarantee. If a public authority is unwilling to retain somelevel of volume or usage risk – on a new toll road for example – financing the project is likely to be more difficult.
A fairlybalanced risk sharing mechanism will encourage investors who may be willing to take some risks between
an agreed minimum or maximum level of usage, but are unlikely to be prepared to take all of the risk.
d. Consider any adverse impact of post-closing changes in law and regulations, including tariff reductions,and the appropriate compensation mechanisms in the case of any such changes: Regulators and public
sector authorities should maintain transparency as well as consistency with regards to tariff-setting,monitoring regulatory controls and/or relevant laws post-financial close of a transaction. For example,
a review of regulators’ and public sector authorities’ past practice of tariff reviews, including retrospective changes
to tariffs against a variety of asset classes/projects, and appropriate compensation in the case of regulatory or
contractual changes, could help to assuage investors’ concerns over certain regulatory and legal risk associatedwith the underlying revenues of the project.
e. Consider the FX risk of the project: Loans or bonds can be issued, in USD or local currency, to fund theinfrastructure project, which may leave issuers and investors exposed to FX risk. Issuers and investors will haveto be comfortable with the currency risk or hedge the exposure. The cost of hedging can be important, especially
if the market is not liquid enough. Some features, such as a guaranteed FX rate in the concession agreement oravailability style payment, would make it easier for an investor to bear the FX risk.

1.2 Scope of the Guide
This Guide focuses on project finance loans and bonds, defined as financings based on single project assets typicallystructured as Public Private Partnerships (PPPs). PPPs are transactions where a public sector entity contracts withthe private sector through concession contracts of various types, or service contracts where a significant portionof financing is provided by the private sector. Such financings are generally without recourse - or with very limited
recourse - to the sponsors and shareholders.

1.3 Differentiating between loans and bonds
How sponsors or procurement authorities choose the most efficient financing depends on a variety of factors. Deciding
whether a bank loan, debt private placement or project bond finance in the capital markets is more attractive for a
specific project depends on factors such as: the size of the transaction, its complexity, the type of the transaction,bank and capital market conditions at the relevant time, issuance and swap costs, the need for special terms suchas any non-standard covenants, the time available for the marketing, preparation of the financial documentation,
strategic considerations such as investor diversification and public visibility and whether staged drawdowns of funds
4

6

See Appendix F

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

are available and if not, the expected costs of negative carry.
The financing implementation processes for bank loan and bond market finance differ in certain respects. These can
include: the participants, the issuance process and timing, the transaction pricing process, credit review processes,
documentation and key terms (including covenants), all-in costs, and the use of official credit support programmes.
For project bond issuances, this Guide also illustrates the various considerations applying to the two basic categories
of infrastructure projects:
a. greenfield (ground-breaking and construction), andb. brownfield or operational
However, within the so-called brownfield category, there may be a further distinction to the extent that a project requires
significant improvements, upgrades or expansion – any of which could negate or diminish the underlying revenue
stream (also called “yellowfield” assets). Within these categories, transactions can be further analysed based on thetype of credit enhancement provided and investors’ exposure to volume/usage and other risks. It is important to notethat many large project financing transactions include both commercial bank facilities and project bond financing. In
fact, all greenfield projects are likely to need some basic commercial bank debt facilities (e.g. working capital finance).
This multi-source approach may be used for a variety of reasons, including the diversification of financing sources, theuse of bank financing as a temporary bridge while awaiting optimal capital market financing conditions and the needfor revolving working capital finance, which realistically can only be provided by banks.

1.4 Marketing
In addition, this Guide focuses on the project bond marketing process, profiling different investors and their capacities
for investing in particular types of project bonds or loans.

1.5 Appendices
For reference purposes, the Appendices include: examples of transactions completed, indicative implementation
timetable, documentation requirements, sample credit review checklists, details of support schemes and guarantees
and a glossary of terms and further resources available.

1.6 ASIFMA Project Bonds Fact sheet
ASIFMA has also published a useful factsheet on project bonds for Asian infrastructure outlining considerations for
attracting foreign investors.5

5

www.asifma.org/uploadedFiles/ASIFMA Infrastructure Project Bonds Factsheet Final version.pdf

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

7

Edited by	2. Overview of the bank loan andproject bond markets

In Asia, dominant lenders for infrastructure projects are governments, multi-lateral institutions and banks, however, theinfrastructure investment need in Asia is estimated to be USD 8 trillion between 2010 and 20206, which is beyond thefunding capabilities of those entities. Sources of infrastructure finance are changing. While the aforementioned remain
the dominant lenders to infrastructure projects, capital markets investors are starting to make significant inroads into
the marketplace as pension and insurance monies look for long-dated investments backed by stable cash flow
characteristics. Over time, this trend is expected to continue, giving sponsors a greater diversity of finance sources.
Project companies, like any businesses, require equity financing to, inter alia, provide first loss support to debt
investors. However, project companies are normally highly leveraged and, while there is no strict rule, they generally
require only around 25% of total capital to be in the form of equity, with the balance of the total capital requirement
coming from various debt instruments. The deleveraging and shrinking of many banks’ balance sheets – together withchanges in banks’ lending policies as a result of regulations (including the Basel III requirements for increased bankcapital and liquidity) ― have led some global banks to reduce project finance lending commitments. At the same time,
capital market investors such as insurers, specialist fund managers, pension funds and sovereign wealth funds haveincreased their capacity to invest in project bonds and equity. Insurance companies and pension funds are, in fact,‘natural’ investors in infrastructure assets, since the long maturity and fixed rate nature of project bonds are a good
match to their long-term liabilities.
There is a need to diversify infrastructure funding through capital markets, possibly through project bonds, which
would help to provide an additional source of liquidity for projects, either by funding greenfield projects or more likely,by providing a refinancing option for projects after construction (i.e brownfield projects), thereby enabling bank lenders
and/or governments / multilateral institutions to recycle their capital into new projects. Given the significant gap in
infrastructure financing, capital markets can play a particularly important role in providing a source of long term local
currency financing needed for developing essential infrastructure in emerging markets.
Some Asian countries seem more prepared than others to develop a strong project bond market. It is quite possiblethat we will see some infrastructure project bonds in Philippines, Indonesia or China in the coming years. However,
it is also possible that investors would prefer other forms of financing such as infrastructure project loans or hybrid
bonds which might better fit investors’ needs.
The form of investment can affect its appeal to investors due to regulatory or commercial restrictions contained intheir mandates regarding, for example, listing, credit ratings and security. Project bonds can either be listed on astock exchange, or issued on an unlisted basis. Listing and public credit ratings have the advantage of potentiallyexpanding a transaction’s investor base and enhancing liquidity, but at the cost of requiring the issuer (which may
be the project company, or a sister company which issues the bonds and on-lends the proceeds to the projectcompany) to comply with various listing-related regulations and information requirements. That said, this may be seen
as an advantage, given that the transaction then benefits from the confirmation that the disclosure has complied withthe relevant listing rules or rating agency requirements. A “public” transaction is almost always likely to require a listing
and a credit rating, while a privately placed transaction can be listed or unlisted, and while a public credit rating is often
preferred, it may not always be required.
Project bonds represent a valuable, diverse source of additional liquidity and also offer longer tenors than many banks
can generally provide, including tenors that may match the length of the concession period.
To attract foreign investors, an infrastructure project bond in Asia requires a developed, liquid government and credit
capital market as well as capability to fulfil a client’s need in terms of risk, guarantee, framework, market, bond structure,credit enhancement and type of financing. A project bond, less risky, and as close as possible to a vanilla product,with clear concession agreement, investment grade, without significant political or construction risk and with the bondtaking out (at least in part) the bank/government/multi-lateral funding, is more likely to be funded. Key factors which may
encourage investment in a project bond include bankability, optimal legal & regulatory framework, credit enhancement,risk managed project (FX, construction, default, revenue, inflation …), rating, and capability of being securitized.

68

Source: ADB

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

It is envisaged that Multilateral Development Banks (MDBs) such as ADB, AIIB and IFC (each as described further
upon in section 3) could play a significant role in providing credit enhancement, risk mitigation, co-lending or othertypes of support and participation in infrastructure projects for them to become attractive to bond investors.

2.1 Growth in the project bond market
As the following tables illustrate, while bank loan finance remains the predominant form of project financing, bondfinancing increased between 2013 and 2014 globally, from 19% to 20%, before dropping to 11% in 2015. In 2015,bond financing in Asia comprised 6.5% of total project finance debt issuance by value (USD 5.2 billion), 6.5% or USD
4.95 billion in 2014 and 4.5% or USD 2.99 billion in 2013 – substantially higher than just 1.4% in 2008 (source: PFIThomson Reuters). On a global basis, Asian project bonds accounted for approximately 15% of global project bondissuance in 2015 as against 10% in 2014 and 6% in 2013.
Figure 1: Global and Asia Pacific issuance of project bonds and loans
GlobalAsia Pacific (inc Australia & Japan)(in USD million) 2013

2014

2015

(in USD million) 2013

2014

2015

Loans

205,423

259,285

277,174

Loans

63,72671,00475,438

Bonds

49,25550,32235,760

Bonds

2,986

4,951

5,284

% Bonds

19%

16%

11%

% Bonds

4.5%

6.5%

6.5%

% APAC
Bonds in
Global Bonds

6%

10%

15%

Total

66,71275,95580,722

Total

254,678309,617

312,934

Source: PFI, Thomson Reuters
Figure 2: Asia Pacific bonds and loans issuanceTotal debts issuance USD bn

120

98.6%

99.5%

94.0%
107

97

100
80

97.3%

73

96.8%

95.5%

93.5%

93.5%

90%
92

80%
76

67

81

67

70%
60%

60

50%
40%

40

30%
20%

20
1.4%
0

100%

2008

0.5%
2009

6.0%

2.7%

3.2%

4.5%

2010

2011

2012

2013

6.5%

6.5%

2014

2015

10%
0%

Total debt issuance in Asia Pacific (inc Australia & Japan)% of Bonds% of Loans

Source: PFI, Thomson Reuters

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

9

Figure 3: Asia Pacific bonds and loans issuance per country (in USD million)
Japan
Australia
Malaysia
VietnamHong Kong
Philippines
China
ThailandIndonesia
TaiwanSouth Korea
SingaporeIndia
10,00020,00030,00040,000Asia Project Bonds 2013-2015

50,00060,00070,00080,00090,000100,000

Asia Project Loans 2013-2015

Source: PFI, Thomson Reuters7
Figure 4: Regional composition of project finance
Loans

Bonds

% Bonds vs Loans(in USD million) 2013

2014

2015

2013

2014

2015

2013

2014

2015

Americas53,431

93,742

92,691

26,56324,807

19,728

33.2%

20.9%

17.5%

EMEA

88,266

94,539109,046

19,706

20,574

10,748

18.3%

17.9%

9.0%

Asia Pacific

63,72671,00475,438

2,986

4,951

5,284

4.5%

6.5%

6.5%

Total

205,423 259,285 277,174

49,25550,33235,760

19.3%

16.3%

11.4%

Source: PFI, Thomson Reuters

7

10

The data in these tables, published by Thomson Reuters/PFI, is compiled from submissions sent in from commercial banks and financial advisers. Only transactions that are limited or nonrecourse are included. The data includes issuance of syndicated and bilateral loans, and public bond transactions as well as private. Data was converted from actual local/host currency to
USD with the currency rate as of end of each fiscal year.

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

Figure 5: Sector composition of projects financed by bonds – global in 2015
Sector

USD(m)# of Deals%

Oil & Gas

2,975

3

3%

Infrastructure

14,507

39

38%

Power

15,40946

44%

Social Infrastructure

2,265

13

13%

Petrochemicals

210

1

1%

Telecoms

394

2

2%

Total

35,760104

Source: PFI, Thomson Reuters

2.2 The Asia Pacific (including Australia & Japan) PPP Market
Public Private Partnership (PPP) transactions are described in paragraph 1.2 and in section 4 below. In 2015, Asia
Pacific (including Australia & Japan) PPP transactions represented an aggregate value of USD 18.3 billion across 12transactions compared to USD 70.1 billion for 30 transactions in 2014 and USD 27.3 billion for 38 transactions in2013. The vast majority of the PPP transactions occurred in the transport sector (86%).
Figure 6: Asia Pacific (inc Australia & Japan) PPP market

Aggregate value of
PPP transactions(USD million)
Number oftransactions

2008

2009

2010

2011

2012

2013

2014

2015

56,553136,097

84,234

26,48448,067

27,333

70,114

18,334

23

21

40

50

38

38

30

12

Source: PFI, Thomson Reuters
Figure 7: Sector composition of PPP volumes in Asia Pacific (USD million)
Sector

2014

2015

Transportation

64,606

15,735

Water & Sewerage

3,532

-

Power

1,185

465

Leisure & Property

762

2,134

Waste & Recycling

29-

70,114

18,334

Total
Source: PFI, Thomson Reuters

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

11

Edited by

3. Highlights of ADB, AIIB and IFC

In Asia, MDBs play a very important role in infrastructure financing. Governments willing to build infrastructure or
private infrastructure projects may not have enough funding or have a poor credit rating which might prevent themfrom securing their project.
Partnering up with an MDB will help to develop the infrastructure project, by providing funding, helping strengthening
the project through credit enhancement, providing guarantees to the project, all of which will help to reduce the risksof the project.
Some of the key players in the Asian infrastructure market are ADB, AIIB and IFC, all as further described below.

3.1 The Asian Development Bank
3.1.1 Introduction
The Asian Development Bank (ADB) was conceived in the early 1960s as a financial institution that would be Asianin character and would foster economic growth and co-operation in the regions. ADB is composed of 67 members,
48 of which are from the Asia Pacific region.
As an MDB, ADB provides loans, technical assistance and grants to shareholders and private enterprises of developing
member countries through equity investments and loans. ADB also help to facilitate policy dialogues, provide advisory
services, and mobilise financial resources through co-financing operations that tap official, commercial, and export
credit sources
ADB raises funds through bond issues on global capital markets and members’ contributions, retained earnings fromlending operations, and the repayment of loans. ADB also provide loans and grants from a number of special funds.
3.1.2 ADB’s private sector operations
As a catalyst for private investments, ADB provides direct financial assistance to private sector projects. While ADB’s
participation is usually limited, it leverages a large amount of funds from commercial sources to finance these projects.
Projects must also have clear development impacts and/or demonstration effects that go beyond the benefits
captured in the financial rate of return.
ADB’s private sector focus areas include private sector participation in infrastructure and capital market development,
broadening of country and sector reach, wider use of credit enhancement and other instruments, and strategic
alliances with other development agencies.
ADB approved a record $2.6 billion of new financing and investments for the private sector in 2015, a 37% increase
from a year earlier and 62% higher than in 2013. As a result of this expansion, ADB’s private sector investment
portfolio has increased to over $8 billion, and its private sector operations are now targeted to double from current
levels by 2020.

12

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

3.2 The Asia Infrastructure Investment Bank
3.2.1 Introduction
Formed in October 2014, the Asian Infrastructure Investment
Bank (AIIB), based in Beijing, is the newest major MDB.
AIIB’s 57 prospective founding members are developing
its core philosophy, principles, policies, value system andoperating platform, based on those of existing MDBs andthe private sector.
The AIIB will focus on the development of infrastructure andother productive sectors in Asia, including energy and power,transportation and telecommunications, rural infrastructure
and agriculture development, water supply and sanitation,
environmental protection, urban development and logistics.
AIIB will complement and cooperate with the existing MDBs to jointly address infrastructure needs in Asia.
3.2.2 How AIIB funds and select projects
Working together with other MDBs, the AIIB expects to sponsor inaugural projects in Pakistan, Tajikistan, Uzbekistan,and Kazakhstan, including, specifically, a highway in Pakistan, an expressway connecting Dushanbe, the Tajik capital,
to the Uzbek border, and a peripheral ring road for the city of Almaty in Kazakhstan.
The AIIB expects to approve USD1.2 billion in project financing in 2016, and will likely announce several otherprojects announced before the end of the year.
AIIB will initially focus on projects led by other MDBs. This will allow AIIB to draw on other MDBs’ decades of experienceand expertise, and demonstrate its willingness to adhere to the same lending standards. Co-financing will also benefit
established MDBs, as they can tap into AIIB’s capital (initial paid-in capital of USD20 billion for the first five years, total
USD 100 billion).
AIIB and the World Bank also signed the first co-financing framework agreement which outlines the co-financing
parameters of World Bank-AIIB investment projects for the two institutions to jointly develop projects in 2016. The
World Bank and the AIIB are currently discussing nearly one dozen co-financed projects in sectors that include
transport, water and energy in Central Asia, South Asia and East Asia. Under the agreement, the World Bank
will prepare and supervise the co-financed projects in accordance with its policies and procedures in areas likeprocurement, environment and social safeguards.
The establishment of the AIIB is an important development for infrastructure funding in the Asia region which should
accelerate financing for a range of projects over the next few years.

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

13

3.3 The International Finance Corporation
The international Finance Corporation (IFC), a member of the World Bank Group, is the largest global development
institution focused on the private sector in developing countries. Established in 1956, IFC is owned by 184 member
countries that govern the institution and provide oversight of its policies.
IFC is a provider of capital, knowledge and partnerships that can help address constraints in areas such as finance,
infrastructure, capacity building, and the regulatory environment. IFC can also leverage products and services of otherinstitutions in the World Bank Group.
IFC mobilizes third-party resources for emerging markets corporate clients and projects, which creates a development
impact beyond its direct resources.
3.3.1 IFC Priorities in Infrastructure
IFC is involved in energy, transportation, and municipal infrastructure development in emerging markets, drawing on
its sector and regulatory expertise. IFC provides a range of tailored financing, including loans, equity, quasi-equity,and local currency products. IFC also develops early-stage projects through IFC InfraVentures and mobilizes funding
through its syndications programs and IFC’s Asset Management Company.
In the past decade, IFC has invested over USD45 billion, including funds mobilized from other investors, ininfrastructure and natural resources companies. In the fiscal year 2015, IFC’s commitments in such projects
reached USD5.8 billion.
Figure 8: FY15 Infrastructure Commitments by Sector and Region		

By Sector						Utlities
13%

Other
1%

Oil, Gas& Mining
14%

Transportation
23%

By Region
Other
6%
Latin America &the Caribbean
25%

Middle East &North Africa
17%Electric
Power
49%

South
Asia
13%

East Asia &the Pacific12%Europe &Central Asia
13%

Sub-SaharanAfrica14%*IFC year-end is June 30th

14

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

3.3.2 Capital Market Financing for Infrastructure
IFC is focused on providing capital market solutions for infrastructure companies and projects that can complement
equity and loan offerings while crowding in institutional investors into emerging market infrastructure. Given thesignificant gap in infrastructure financing, capital markets can play a particularly important role in providing a source oflong term local currency financing needed for developing essential infrastructure in emerging markets.
IFC facilitates a variety of funded and unfunded capital market solutions for infrastructure ranging from anchor
investments to structured products such as credit enhancement, tailored to a company or project’s needs. In orderto foster institutional investor participation in financing infrastructure, IFC leverages its risk taking and risk assessment
capacity while taking advantage of the strength of its own balance sheet for credit enhancement when necessary.
IFC has provided local-currency financing solutions in more than 60 currencies through loans, swaps, guarantees,
and structured and securitized products.
For example, credit enhancement through IFC can provide the needed rating uplift for a corporate or project bondwhich may allow for a wider institutional investor participation in a bond. Alternatively, IFC may lead a syndicate ofguarantors to wrap the construction risk on a project bond enabling the sponsor to take advantage of long-term
capital market financing for a greenfield project. Or, IFC may provide a subordinated loan to a project to facilitate
the successful placement of senior debt in the capital markets. Such approaches, when structured appropriately,
leverage on institutional investors’ comparative advantage in providing longer term financing, and can limit refinancing
risks or investors need to engage in active management of construction risks.
IFC and other multilateral institutions can play an important role in catalyzing additional capital market financing forinfrastructure financing in Asia through direct and indirect approaches that combine corporate, project and structured
finance techniques. This requires financing solutions that reallocate risks and financing roles more efficiently between
institutional investors, on one hand, and traditional infrastructure lenders, on the other.

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Edited by	4. Project structures, procurement
and planning process

4.1 Procurement of greenfield infrastructure
Projects can be purely private (such as power stations, oil and gas development, pipelines or minerals), may involve apartnership between the public and private sectors (PPPs), or may be built and operated completely in the public sector.
Private projects generally have long-term contracts for their output (for example electricity) and feedstock input (forexample gas). Alternatively, they may have some means of linking input and output prices in order to minimise price risk.
Generally, PPPs are long-term contracts (typically 20-35 years) under which the private sector constructs the project’s
assets (for example, a road) for the public sector, and raises the required finance, usually in a structure that features
some or all of the characteristics of a project financing. This model gives the private sector an exclusive right tooperate, maintain and provide the necessary investment in a public utility for a given number of years, and the public
sector either pays for the availability of the asset (typically called “availability-based” contracts) or the private sector
charges end-users to use the asset (typically called “user-pay” concessions or contracts).
Therefore, the project company may receive revenue from the public sector based on the availability of the asset, or
the project company may be required to take revenue risk (for example by a toll road concession operator receiving
payment from users, or from the public sector (based on usage)). In determining the form of contract, the procurement
authority will need, amongst other things, to consider value-for-money, as in all cases, allocation of the risks and theform of finacning chosen have a cost implication for both the public and the private sector.
Relative to their counterparts in markets with a longer history of employing the PPP model, procuring authorities in Asia
have generally preferred “user pay” concessions to “availability-based” contracts.

4.2 The stages of project finance concession contracts
The process of identifying, creating, building, licensing and (in some cases) negotiating a concession contract toprovide services, whether by the public sector or by the private sector, involves the following stages:
1. Project selection
2. Project preparation
3. Procurement
4. Project construction and
5. Project operation
Specifically, procurement authorities planning PPPs must take a risk-based perspective in order to minimise theproject’s lifetime cost and achieve value-for-money. To achieve this outcome, the procurement authority must bear inmind the risk appetite of the sponsors, contractors and private investors (shareholders, banks and bond holders). By
taking this approach, the procurement authority can reduce the ‘cost of risk’ by allocating it to the party best able tocontrol it, or absorb it within a portfolio of diverse risks. It follows that appropriate risk allocation is one of the key ways
to achieve value-for-money.
This forward-looking approach involves procurement authorities and sponsors anticipating possible adverse scenarios
and their implications for private sector investors. These risks could range from construction-related issues such asengineering, geological or archaeological risks, to more operational issues such as the economic impact of lower
than anticipated project usage, which may, depending on the nature of the asset, cause revenues to the procurement
authority or the private sector partner to be lower than projected.
Revenue risk is particularly sensitive, and for projects with high demand risk, the PPP’s value-for-money process should include
careful consideration of whether the private or public sector should bear this risk, or whether and how it should be shared.

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4.3 Procurement issues
Governments across Asia have widely different practices and regulations applicable to the tendering of PPP contracts. It isbeyond the scope of this Guide to identify the various different rules that apply in different markets8, however there are someconsistent trends emerging with respect to the regulatory regime in the more developed markets in Asia, which include:(a) The adoption of specific PPP enabling legislation. Amongst other things, PPP enabling legislation may specify thetypes of contract that can be entered into by procuring authorities as a PPP (for example, Build-Operate-Transfer
or Build – Own – Operate – Transfer), may be used to overcome limitations in the existing legislative regime relating
to public procurement regime (for example, limits on the authority of procuring authorities to enter into contracts),
may address fiscal or taxation issues and / or may specify the circumstances in which procuring authorities must
consider the use of the PPP model for a project;(b) Prescriptive rules for the conduct of bids, including time limits for public advertisement of requests for expressionsof interest, the conditions for bidders to be short-listed, the required technical and financial aspects of complying
bids, probity rules and ultimately setting out the acceptable grounds on which winning bidders will be selected; and(c) The establishment of specialist PPP departments within government, which are centralised resources of PPP
expertise that are mandated to assist with the identification of projects that may be appropriate for the PPP model,
conducting initial feasibility investigations and structuring projects and / or with procuring and documenting the
PPP. In the most developed jurisdictions, these PPP departments fulfil an important role in publicising the PPP
framework and the pipeline of upcoming transactions (as described further below).
The competition created through a public bid process is an important driver of value-for-money for a PPP procuringauthority. It is not without its challenges, however, as procuring authorities seek to balance prescriptive rules andpractices with respect to the conduct of the procurement process with a desire to make bid processes simple,
accessible and cost effective for participants. Again, issuers’ experience in this regard will vary widely across Asia.
Some common concerns with tender processes in the region include:(i) Tender processes being subject to unpredictable delays, being aborted during the bid phase or the structure, risk
allocation or other key terms of the relevant concession being substantially amended during the bid;(ii) The short-listing of a very large number of potential bidders, resulting in a very significant amount of potential
competition for the concession agreement (or alternatively, a perception that the public sector’s preferred risk
allocation indicates preference towards the public sector, which discourages widespread participation);(iii) Legal limitations on the extent to which offshore investors are entitled to participate in the tender process;(iv) Perceived conflicts of interest or lack of confidence in decision-making by procuring authorities; and/or(v) Inflexible bid rules which encourage the perception of a ‘level playing field’ but which may discourage innovation
by bidders in favour of price competition.

4.4 Brownfield infrastructure
A public bid process may also be relevant in the context of the privatisation of government infrastructure assets, thetendering of long-term operations and maintenance contracts for existing infrastructure assets and where private
owners of infrastructure are looking to sell down their interests in an infrastructure asset. In these contexts, the extent
of specific regulatory rules may be more limited than those applicable to PPPs, but the principles of the bid process
and broadly its structure will often echo those of the more developed PPP tender processes.

4.5 Bond financing for bids
The following describes the issues to be considered by procuring authorities with respect to bond financing, all of which
are important factors when it comes to deliverability and value-for-money in a bid context. Given the complications
8

However, see the APAC Guide to Public Private Partnerships accessible at http://www.allenovery.com/expertise/practices/public-law/Pages/public-private-partnerships.aspx

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raised by project bond financing for greenfield infrastructure projects, these may be more relevant in the context ofbrownfield infrastructure than greenfield infrastructure in the short to medium term in Asia.
Understanding bond terms
Some procuring authorities are focused on ‘execution risk’, which includes the risk that a ‘preferred bidder’ appointed as aresult of a tender process may not in the end be able to execute the transaction because of an inability to arrange financing
on appropriate terms. This is generally less of a focus in Asian markets than in markets that have a longer history of public bid
processes for infrastructure assets, however, even in Asian PPP procurement processes there may be a requirement for someform of evidence of committed financing (or the potential for committed financing). If this is required as part of a complying bid
and bidders are proposing to fund their transaction with project bonds, the procuring authorities may have to compare bondproposals from several bidders. They will therefore need to be able to assess differences in placement capability, pricing levels,
pricing features and means of managing the pricing risk – a process which is more complicated in bond financing than forsimple bank debt as certainty of issuance and the pricing of bonds is only confirmed upon issue (i.e. at financial close).
However, in order to ease the comparison process, a procuring authority may consider, in the tender documents,
requiring bidders to submit an explanation of the pricing methodology used for any proposed bond solution (detailingthe various pricing components), perhaps by reference to market prices for similar bond issues or baskets of bondissues. When seeking final offers, the procuring authority may consider providing indicative bond pricing data whichbidders should use to derive the price of their offer. Such pricing data could break down information according todifferent rating outcomes and other key features of the financing (e.g. interest structures and maturity).

4.6 Risk of fluctuations in bond pricing
As final public bond pricing is largely market-driven, there is a risk of price fluctuation between final offers and financial
close. However, it is important from the point of view of deliverability of funding, as well as to be able to ascertain
relative value-for-money, that the procurement authority secures committed financing at final offer stage, which may
be a requirement in some jurisdictions. As a result, a risk-sharing mechanism should be discussed at an early stageof the procurement process; depending on the jurisdiction, this will often result in bidders providing a firm upfront
commitment, notwithstanding any such potential fluctuations, with the fluctuation risk being assumed by all or a
combination of the sponsor, the bidder, the investors and the procurement authority, as agreed.
Figure 9: Typical procurement timeline
General marketing

Sourcing

Deal Negotiation

Potential Lenders
submit indicative
Terms and Pricing

OJEU
NoticePre-qual.
submissions

Lenders seek
formal Credit
Approval

Best andFinal Offers

Shortlist 3 Bidders
Consortia Form

Deal Execution

Lenders
selection

Bid Preparation

6 months

Preparation of Documentation
and Finalisation of any
outstanding due diligence

Preferredbidder award

Commercial
close deadline

Financialclose deadline

Committed
Finance
Commercial and Financial Close

3 months

3-6 months

Investing into infrastructure is a long term commitment

Source: Allianz Global Investors
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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

4.7 Ratings/timing issues
To inform its financing strategy, the project company may hire one or more credit rating agencies to provide indicative
ratings, which can be provided in advance of a bid submission. While this will almost always be the case for bondfinancing, depending on the particular bank, a credit rating agency may be engaged to give a view on the credit even
if a bank-only solution is contemplated, or for the purposes of assessing whether a refinancing in the public bondmarket could be made in the future. If procuring authorities are looking to encourage the use of bond financing fortransactions, it would be helpful to ensure that the procurement timetables cater for the credit rating agency process,which can take some time to prepare, as well as factoring in time for preparation of documents, marketing andmeeting regulatory requirements, as more fully described further in this Guide.
The preferred bidder/sponsors and the arrangers of the financing (whether bank or bond) undertake appropriate due
diligence, which will be updated (by way of “bring-down due diligence”) before the financing documentation is finalised.
To have reached this stage, each of the relevant stakeholders has to be satisfied that the various aspects of the
proposed venture are sound from the engineering/technical, environmental, legal and economic perspectives, andthat the level of risk they are assuming in each of these and other areas of the project is acceptable.
The chart below shows the structure of a typical project financing:
Figure 10: Structure of a typical project financing

Shareholders

Insurers

Insurance
Agreements

Offtaker

Offtake
Agreement

Project Co

Banks/ECAs/
Multilaterals/
Bondholders

Financing
Agreements

Feedstock/FuelSupply Agent
Construction
Contract

Construction
Contractor

O&M Services
Contract

O&M Services
ProviderManagement
Services Contract

Feedstock/
Fuel SupplierManagement
Services Provider

Source: Moody’s Default and Recovery Rates for Project Finance Bank Loans 1983-2014, March 2016

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4.8 Pipeline
Infrastructure financing requires significant expertise, which is not yet fully developed in Asia. The emergence of an
attractive pipeline of projects should encourage institutional investors to commit resources to researching infrastructure
investment opportunities. Such a development could in turn create a virtuous circle in which the investors’ increased
familiarity with the asset class incentivizes them to increase investment in the sector, and the sponsors are therefore
encouraged to submit more projects for financing.
Figure 11: Institutional Investor Virtuous Circle for Infrastructure Financing
Alignment of interest
between institutional
investors, policy makers
and other infratsructure
sector stakeholders

Evolution from credit
enhanced structures to adiverse range of funded
projects, including
uncovered projects

Increasing institutional
investor familiarity withthe asset classCreation of
investable projects

incremental financing
and resource
committments byinstitutional investor

Source: Moody’s Investors Service
This is both a matter of substance and form – that is, to attract international bond investors, jurisdictions will needto have in substance characteristics that support a predictable pipeline of transactions and will need to present thatpipeline in a format that is accessible and attractive to potential investors.
At present, national PPP departments/centres often publish lists of upcoming transactions9 but there is no reliable
centralised collection of information about the pipeline of infrastructure transactions Asia-wide. One of the potential
initiatives of the G:20 Infrastructure Hub10 is to address this with the publication of a regional infrastructure pipeline.

9

See for example the pipeline of projects published by the PPP Center of the Philippines accessible at https://ppp.gov.ph/?page_id=26075 and for India at http://www.pppinindia.com/pppcentre-highways.php
10 http://globalinfrastructurehub.org/

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Edited by	5. Debt financing choices: corporate finance or
project finance, loan finance or bond finance

When deciding how to finance the debt component of an infrastructure project, the choice by a sponsor will typicallybe determined by a number of factors, principally:• Lowest overall cost, a key consideration particularly in a competitive bidding situation;• Recourse to sponsor;• Accompanying risks, such as the need to re-finance or execute additional hedges;• Certainty and ease of implementation;• Ongoing flexibility; and• Covenant and security requirements.
The final choice will be driven by a combination of the sponsors’ objectives and the requirements and circumstancesof the underlying infrastructure asset to be financed.

5.1 Funding Structures
The primary choice is on the overall type of the financing to be raised; this can either be done on a stand-alone basis,
without direct recourse to the sponsors, generally referred to as project finance, or on-balance sheet with full recourse
to the sponsors, generally referred to as corporate finance.
5.1.1 Project financing
The underlying nature of infrastructure assets makes the use of project finance particularly suitable due to:• Long term stable and predictable cash flows;• Risk profile reducing over time, most notably after the completion of the initial construction;• It typically taking a group of sponsors with diverse skills to successfully construct and operate an infrastructure
project; and• Off balance sheet / non-recourse financing is often attractive to the sponsors in that the debt is not consolidated
if they have a majority stake and if they only have a minority shareholding their corporate borrowing capacity will
not be impacted.
Project financing involves the sponsors establishing a special purpose vehicle (SPV) to implement the project andraise the necessary financing. This company will either acquire the underlying infrastructure asset, which involves
the privatization of an existing asset, or construct the asset, as is typically the case with a PPP project. The key
to a successful project financing is for the SPV to sub-contract or transfer most of the risks to which the project is
exposed, leaving the SPV with a limited residual risk profile, which potential lenders will find acceptable on a standalone basis, albeit whilst relying upon the performance of the sub-contractors to the SPV. Generally, the lower thelevel of residual risk remaining in the SPV, the higher the level of financial leverage that can be achieved. As debt isgenerally a lot cheaper than equity, this makes for an overall more efficient funding structure with a lower weighted
average cost of capital (WACC). Low risk projects with a largely fixed availability based income stream can achievelevels of gearing in excess of 90%, whereas more complex projects with income exposed to market risk, such as atoll road, may only be able to achieve gearing of around 60% or less.
One of the main disadvantages of project finance is that it is highly structured and covenanted, leaving little or no
ongoing flexibility for the SPV itself. Its activities will be limited to implementing and operating the asset, substantially
all its assets will be secured against its borrowings, shareholders will be constrained in disposing of their shares,
additional indebtedness and borrowing will be restricted, there will be strict ongoing compliance with hedging policies
and ongoing reporting requirements. Lenders will conduct an extensive due diligence exercise covering all major
aspects of the project to ensure that the risks and cash flows are thoroughly understood, and the rights and obligationsof all parties will be governed by an array of contracts and other legal documents controlling all aspects of the project.

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At the centre of any project finance transaction is a detailed
financial model covering the entire expected life of the
project, typically around 25 to 30 years. The financial model
projects a fully integrated set of financial statements overthe life of the project, focusing on the cash flows to ensurethat there will be sufficient ongoing cash flow to meet theoperating and debt service obligations. The model will also
have the flexibility to conduct various downside sensitivity
analyses to ensure that it will still be able to repay the debt
in all reasonable downside scenarios. Finally, the financial
model will be subject to independent audit to check its
mathematical accuracy and ensure that the input data
is in line with the underlying contracts, revenue and costprojections.
5.1.2 Corporate financing
In a corporate financing, the lenders take a general view of the underlying businesses and assets of a company
in determining whether the risk of not being able to recover their loan is acceptable. The credit analysis tends tobe more retrospective, focusing on the company’s recent performance and possibly extrapolating the expected
performance over the next few years. The analysis is much less detailed than for a project financing, and the loan
documentation is less onerous in terms of how the company can deploy the borrowings and how the company
may conduct its operations over the term of the loan because the underlying businesses tend to be more fluid andsusceptible to economic cycles. This is also why levels of gearing tend be much lower. Most corporate borrowing
tends to be done on an unsecured basis, tenors are generally much shorter than for project finance and levels ofleverage are a much lower, generally around the 30% level.
A company acquiring an infrastructure asset and funding it on a corporate finance basis could either take the asset
itself onto its own balance sheet or finance it through an SPV subsidiary with a guarantee from the parent company.
Funding an infrastructure asset on this basis would require a much larger equity investment from the sponsor, or it
would absorb a substantially higher proportion of the holding company’s available debt capacity, which could limit its
ability to invest in other assets.
Funding an infrastructure asset on a corporate basis becomes a lot more complex where there is more than
one investor or sponsors involved, because the risks will be combined and the sponsors will need to agree on
how losses are to be shared in the event of there being a default on the loan. If the corporate entity chooses
to finance investment in an asset through on-balance sheet corporate financing, the lenders or investors in therelevant financing will have recourse to all the assets of the corporate entity, and not just to the specific asset
being financed. Depending on the size of the corporate entity relative to the size of the investment in question, thelenders or investors may be more or less concerned with the asset itself, as compared with the performance ofthe corporate entity as a whole.

5.2 Funding Instruments
Once a decision has been made on which type of funding to implement, it will then be necessary to consider thealternative funding instruments available and decide which would be most appropriate for funding the infrastructure
asset and to best achieve the sponsors’ objectives, outlined above. The decision is not always straight-forward,
involving both quantitative and qualitative considerations and the exercise of a degree of professional judgment.
5.2.1 Loan finance
Still the most common source of funding for infrastructure assets is loan financing, principally provided by banks,
although pension funds and specialist infrastructure debt funds are starting to invest in infrastructure loans. The loans

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are generally structured in line with the LMA (Loan Market Association11) Standard, and there is a lot of liquidity of
infrastructure loans in the bank syndication market.
The main advantage of bank loan funding is its underlying flexibility:• Drawdown: Loans can be drawn as the funds are needed to meet project expenditure, subject to what has been
negotiated in the documentation, thereby eliminating the risk of any negative cost of carry; this is a particularly
useful feature during the construction phase of the asset, which typically extends over a number of years;• Prepayment: There are generally no limitations or penalties on the early repayment of loans, which allows flexibility
to adapt to changing circumstances or to take advantage of changing market conditions and re-finance the loan
with a more attractive funding alternative;• Waivers: Banks actively monitor the performance of loans and can therefore show flexibility in granting waivers andreleases in respect of minor problems and issues the project may encounter, provided they are still happy withthe underlying credit. This is an important consideration on more complex projects because there are invariably
instances when things do not go according to plan; and• Renegotiation: If the project is experiencing difficulties it can be possible to renegotiate substantial provisions of
the loan documentation or even manage a work-out, although there is no guarantee how much flexibility individual
banks will show.
Considering the long term nature of infrastructure assets, with concession periods typically being between 25 and 30
years or even up to 75 or 100 years in the case of some airport privatizations, the principal disadvantage of loan financeis its short tenor. Banks rely mainly on short term customer deposits for their financing, are not natural providers oflong term finance and do not generally provide maturities of longer than five or seven years when funding infrastructure
assets12. This forces the sponsors to assume the risk of being able to re-finance the loans at an acceptable cost
before they mature, failing which they will be forced into default. Australia, the most mature market in the region, hasa well-established track record with numerous projects being able to successfully refinance themselves over a long
period of time. However, in countries with lower credit ratings or no history of successful re-financings, it could be
difficult for both borrowers and lenders to get comfortable with being exposed to the re-finance risk. This leads toinefficient financing structures, with the debt having to be fully repaid over a much shorter period and the longer dated
cash flows effectively being fully funded by equity, which requires a substantially higher financing cost to the project.
The current changes to banking regulations with the introduction of new Basel guidelines may make it increasingly
difficult and costly for banks to provide longer maturities, even in the five to seven year maturity range.
Bank debt is mostly floating rate, quoted as margin over a common reference rate such as LIBOR (in the case of USD
funding) or BBSW (in the case of AUD funding). The risk of fluctuations in interest rates then has to be managed byentering into fixed interest rate swaps, which the banks are able to provide. However, this can also create difficulties
if there is a subsequent drop in interest rates leaving the borrower to manage mark-to-market costs if it subsequently
wants to break or replace the interest rate swaps. Not all currencies have liquid swap markets, particularly when it
comes to longer maturities (typically in excess of 10 years) and this can also constrain the debt tenors that banks will
be willing to offer or necessitate an additional cushion to be able to absorb increased interest rates.
The situation is even more complex in some markets, such as India, where there is no common reference interest
rate used by banks and each bank sets its own internal reference rate that will apply to all its customers. This not only
leaves the borrower in the awkward position of having to manage multiple variable rates, but it has also impeded thedevelopment of an interest rate swap market and the only fixed interest rate swaps available are referenced to the USD
cross currency swap market. Borrowers using this to hedge their interest rate risk will be exposed to basis risk, in that
there is not a perfect correlation between the Indian bank reference rates and the USD cross currency swap market.

11 http://www.lma.eu.com/#&panel1-1
12 A notable exception to this general rule is that European banks regularly finance infrastructure assets in their home market with debt tenors of up to 27 or 28 years.

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5.2.2 Bond finance
Bond finance offers a number of advantages over bank loan finance in the financing of infrastructure assets. The maininvestors in the project bond markets are the long term insurers and pension funds who have long dated liabilities andare seeking to match these with secure long dated assets. The stable long term nature of an infrastructure asset’s
cash flows make infrastructure debt an attractive investment opportunity for bond investors.
The advantage of bond financing over bank loan financing is that bond markets are able to offer longer tenor debt atfixed interest rates, thereby reducing or possibly even avoiding the risks associated with refinancing shorter tenor debt
and the necessity of having to enter into long term interest rate swaps to manage the risk of interest rate fluctuation.
The principal disadvantage of bond financing lies in its lack of flexibility. This is particularly applicable during theconstruction or development stage as the full value of the bond will need to be placed at financial close and theborrower will be liable for the interest cost on the full amount of the debt from the date of issue. Although surplus funds
can be invested until they are needed, the generally lower re-investment rate leads to a significant cost of ‘negative
carry’ over the drawdown or investment period. It is sometimes possible to negotiate a staged drawdown for a bondissue, but this will not be as flexible as bank drawdowns and likely result in additional cost via a higher yield.
Bond investors also tend to focus more on credit ratings and yields. Terms and conditions of bond issues are usuallynegotiated by the arrangers and underwriters so bond investors do not develop the close relationships with borrowers
to the same extent that banks do. This makes it difficult to negotiate waivers or variations if the project experiencesdifficulty. Finally, if the borrower wants to repay the debt early, refinance it to take advantage of changed project
circumstances or better market conditions, there are likely to be early repayment penalties or prohibitions.
In Asia Pacific, however, the real issue with bond financing is the lack of a sophisticated developed bond market inmost countries. Even the Australian domestic bond market has only limited appetite for funding infrastructure assets,
preferring instead to focus on local sovereign and higher rated corporate issuers.
Globally, the most liquid and developed bond markets are in North America and Europe, which have pioneered
project bond development. In the USA there are effectively two distinct markets:• the public-style / 144a market, which typically caters for larger liquid issues of at least USD 1.0 billion, which aretraded on the open market to Qualified Institutional Buyers (QIBs); and• the Private Placement (PP) market where bonds are offered to a relatively small group of select investors who
accept that the issue is not going to be liquid and generally expect to hold the bond until maturity.
Bond issues in the 144a market are offered by way of prospectus and investors have limited opportunity to structureor negotiate the terms of an issue. Accordingly investors in the 144a market typically operate rely on the secondary
market to manage down their exposure if they do like the way the project is progressing. It can often be difficult to
identify the investors once the paper has been trading for a while, and even more difficult to obtain investor agreement
on waivers and other amendments to bond terms.
In the PP market, however, investors are very hands-on in structuring the transaction, perform their own diligencemuch like banks do, go on site visits, interact with technical and market consultants and meet management. In the PP
market, investors are generally from the buy-and-hold category, there is not much secondary liquidity. It is not unusual
for issuers to hold annual informational meetings attended by bond investors.
The PP market is ideally suited to developed jurisdictions like Australia, as PP investors have little appetite for emerging
market risk leaving issuers in emerging markets to rely more on 144a issuances.
Although a number of infrastructure issuers in the Asia Pacific market have accessed the international bond market,
it has been limited to large high profile issuers such as major international airports and ports. Even for these issuers
there is the added complication of having to secure matching long dated cross-currency swaps, unless they have anatural hedge in the form of USD based revenue streams (often the case with international airports and ports).
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Bond markets are not as stable as bank markets and it is not uncommon for bond markets to close during periods offinancial instability when bond investors do not have appetite for investing in new issues. Banks, on the other hand,
tend to be more robust and though some banks may stop making new advances during periods of substantial market
disruption, it is very unusual for the bank market to be totally closed to new business.
ASIFMA has published a useful factsheet on project bonds for Asian infrastructure outlining considerations for
attracting foreign investors13.
5.2.3 Conclusion
Most infrastructure projects tend to be financed on a project finance basis because of the substantially higher levelsof gearing that can be achieved, compared to corporate financing, which drives a lower average cost of funding. This
also helps preserve the sponsors’ overall debt capacity and enables them to invest in more projects before being
forced to raise additional capital or divest investments to re-cycle capital.
The flexibility associated with bank loan financing is much more useful over the initial construction or investment period,
where potential difficulties or variations are more likely to arise and the negative carry associated with bond financing
is avoided. Once the construction has been completed and the operational phase of the project has stabilized, theoverall risk profile of the project is substantially reduced and many infrastructure projects are re-financed. At this stage,
the focus is more on securing stable, long term financing to match the underlying term of the project and quite often
re-financings are done in the capital markets, where there is a liquid bond market for borrowers to access.
A variation on this theme is so called ‘bridge-to-bond’ financing, often employed on infrastructure asset privatizations.
In this case the sponsors raise short term bank financing, typically with a maturity of between six months and two
years, with a view to re-financing in the bond market shortly after taking ownership of the asset. This approach gives
the potential buyer more flexibility over the bidding period and gives the seller comfort that the buyer has access to thenecessary funds to purchase the asset. It would not be practical for a potential buyer to raise bond financing before
they know that they have secured the asset and sellers are unlikely to take the risk that the buyer will not be able tosubsequently raise the funds to pay for the asset.
The FX risk, currency of issue and cost of hedging all have to be taken into account when considering Infrastructure
financing. The “ASIFMA Asian Infrastructure Project Bond Factsheet: Attracting Foreign Investors” treats these points
more extensively.14

13 www.asifma.org/uploadedFiles/ASIFMA Infrastructure Project Bonds Factsheet Final version.pdf
14 www.asifma.org/uploadedFiles/ASIFMA Infrastructure Project Bonds Factsheet Final version.pdf

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Edited by	6. Mechanics of issuance of debt
– parties, roles and tasks

While the time taken between making a debt financing decision and receiving funds varies, typically raising a project
finance loan or issuing a bond can take between three to four months, which is included as part of the overall longer
transaction timeframe of 12-15 months or more. The exact timing depends on a range of issues and due diligencerequirements, such as how long the bank’s in-house credit assessment team takes to evaluate the credit risk (ifrelevant), the time required for credit review by rating agencies and investors, preparation of disclosure documents
such as an offering memorandum or prospectus, the listing process, the opening of bank accounts, planning andimplementation of a roadshow marketing process and preparation of final transaction documentation.
However, notwithstanding the financing element, it is difficult to specify the exact time needed for the overall transaction.
Some greenfield projects can take up to two years to arrange (or even more in certain countries), from the point when
the tender process starts. By contrast, the process of acquiring brownfield assets might be completed in just threemonths from the point of award of preferred bidder status.

6.1 Public bond issuance process – summary
Public bonds may be issued either by the project company, or by a separate (usually sister) company incorporated
to issue the bonds and on-lend the proceeds to the project company, on the basis that the obligations of the sistercompany are guaranteed by the project company. For the avoidance of doubt, in this section and in section 7 below,
a reference to the “issuer” is to the project company as the issuer of the bonds, or its sister company incorporated
for such purposes.
When issuing, the first steps are to check compliance with the issuer’s constitutional documents, obtain all relevant
and required internal and external authorisations, and check compliance with local regulations. After the decision toproceed has been made, the issuance process can broadly be described in five steps:
1. Selecting transaction participants, agreeing on a timeline and preparing an estimate of all-in costs (described inthis section),
2. Structuring the transaction and preparing documents, including deciding which market is most appropriate totarget, or whether credit enhancement and/or a guarantee are needed (see section 10),
3. Preparing for credit review and due diligence by bank, investors and credit ratings agencies (see section 11 andAppendix D),
4. Preparing for investor road show (see section 7), and
5. Preparing for ongoing reporting to bank, investor and credit ratings agencies (see section 8 and Appendix D).

6.2 Selection of key people/transaction participants – advisors and distributors
Sponsors, issuers and procurement authorities typically hire one or more advisors to help them make the necessarybank loan or project bond decisions as to the financing alternatives available and to provide assistance with estimatesof all-in costs, recommended transaction participants, how to structure the transaction, compliance with relevant local
regulations, communications with credit rating agencies and, if project bond financing is selected, to provide advice
on distribution strategy and marketing of the bonds to investors. The advisor is likely to be a bank, an investment bankor a consulting firm. Participants can vary somewhat from country to country on the basis of specific national legal
and regulatory requirements.
When raising a bank loan, deciding which bank to mandate as lead arranger usually depends on criteria such as
existing and prior relationships, financing capacity, product expertise, local expertise (if needed), pricing, terms, ability
to provide related products such as swaps, payment services and trustee/custodian services.
For project bonds, similar criteria are considered when appointing one or more investment banks as arrangers.
Additional deciding factors might include an investment bank’s experience in structuring project financing transactions,
its investor distribution network, execution capabilities and other services.
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An issuer may choose to distribute its project bonds through either one or a syndicate of arrangers (see section 7).
An arranger (or syndicate) may distribute the bonds in one of two ways:
1. As a “placement”, where the arranger serves as an advisor, structures the transaction, and acts as a placement
agent pursuant to a placement agreement, locating investors but not committing to subscribe for any bonds.
2. As an “underwriting”, where the arranger serves as an advisor, structures the transaction, and subscribes foror purchases the bonds pursuant to a subscription agreement or underwriting agreement. In practice however,
the arranger will only enter into the agreement to subscribe for or purchase the bonds for a few days prior to theclosing date, and prior to doing so the arranger will have entered into back-to-back arrangements with investors
whereby investors commit to buying the bonds from the arranger. If this arrangement is not honoured by theinvestor, the arranger remains bound to subscribe for (or purchase) the bonds pursuant to the terms of thesubscription (or underwriting) agreement.
6.2.1 Paying agent and trustee
A paying agent is required to make the payments of principal and interest to investors (some, but not all, investmentbanks offer this service). A paying agent is the issuer’s agent and has no contractual duty to the bondholders.
A trustee will generally be appointed by the issuer15. The trustee owes its principal duty as trustee to the bondholders
and acts as fiduciary for bondholders in the event of a default. The trustee (or an independent security agent or
security trustee) would normally hold the security and/or collateral for the benefit of the bondholders. The trustee has acontractual relationship through the trust deed to the issuer, but also has a fiduciary relationship with the bondholders– the beneficiaries. In a trustee structure, the holder of the bond is bound by the terms and conditions of that bondand the trust deed, including the fact that legal action to enforce the terms and conditions of the bond or any related
security can only be taken by the trustee and not by individual bond holders (other than in very limited circumstances,such as where the trustee is obliged to take such action in accordance with the terms and conditions of the bond andthe trust deed but fails to do so). Additionally, the trustee would typically only be required to take any such action if it
has been instructed to do so by the applicable quorum (if applicable) and majority of the bondholders, as specified
in the bond terms and conditions and/or the trust deed. As a general rule, the quorum (if applicable) and majority
applicable to publicly issued bonds are less onerous than those applicable to an equivalent bank loan due to the factthat bondholders are less likely to engage in decision-making processes than holders of bank debt, bonds are likely
to be may be widely held than bank debt and (while the bonds are lodged with a clearing system) the identities of thebondholders are often difficult to determine.
6.2.2 Lawyers
Both the issuer and the arrangers (or, on certain deals, the investors) will be represented by their own legal counsel,
who will help to negotiate and draft project bond documentation. As the project bond documents themselves are
frequently governed by English or New York law, the issuer and / or arrangers may retain both local counsel andinternational counsel. As a condition precedent to financing, each set of lawyers may be required to give the arrangers(or investors) a legal opinion in both the jurisdiction of the governing law of the documents and the jurisdiction ofincorporation of the issuer. This opinion would, typically, cover points such as: due incorporation of the issuer, theauthority of the issuer to enter into the bond transaction, and the validity, binding nature and enforceability of theobligations under the transaction documents. In many cases, investors will rely on the same legal advisors as theplacement agent/arranger.
6.2.3 Auditors / Accountants
The role of auditors will generally be twofold in infrastructure financing in the capital markets. As a condition precedent
to financing, and as part of the due diligence process, the issuer’s auditors may be required to give arrangers a“comfort letter”, the scope and limitations of which will be agreed between the parties in an arrangement letter,pursuant to which the auditors will be required to review the audited and management accounts (if any) of the issuer,and carry out certain agreed non-audit procedures. The auditor’s role in providing an agreed-upon procedures reportwith respect to the cash flow model may be particularly important in the context of project financing transactions,
15 The concept of trustee is not recognised under all laws.

ASIFMA–ICMA Guide to Infrastructure Financing in Asia27

where historical financial data may be minimal and/or of limited use. These procedures are designed to ensure theaccuracy of certain financial information contained in the offering memorandum or prospectus, and to confirm there
are no material adverse changes, on the basis of agreed procedures. In addition, auditors will audit the ongoing
financial statements of the issuer.
6.2.4 Technical advisors
A technical advisor (TA) is typically appointed on greenfield projects, to assist with the technical aspects of thedisclosure materials / offering memorandum (including by providing a technical report where appropriate) and toprovide advice to creditors with the technical aspects of the design and construction, engineering and commissioningof the project. In certain projects, the TA may also have an ongoing role during the operational phase of the project,including in relation to environmental compliance matters.
6.2.5 Monitoring advisors
A monitoring advisor (MA) may be appointed on a variety of projects, both simple and complex, but its use is still notcommon. Typically appointed by the issuer to act on behalf of the investors, the MA is an infrastructure expert who
facilitates efficient decision-making by investors. The MA advises investors if it agrees with the issuer’s categorisationof a required decision (for example, material, moderately material or heavily material) and may also have authority totake less important decisions. The MA also advises investors on how they should vote, and generally try to build aconsensus among investors.
6.2.6 Tax Advisors
The role of tax advisors in the context of debt issuances will necessarily depend upon the nature of the issuance,
jurisdictional considerations, and the specific legal structure of the party seeking to raise finance. There will invariably
be tax implications for both the borrower and lender including:• Managing the potential for withholding tax for cross-border financings;• Ensuring the tax attributes of the borrower are not adversely impacted (e.g. tax deductibility of borrowing costs,
thin capitalization considerations);• Facilitating access by lenders to pre-tax cashflows through utilizing tax flow-through vehicles (e.g. trusts inAustralia, and various collective investment vehicles (CIVs) like Limited Liability Companies (LLCs) in certain otherjurisdictions); and• Seeking to utilize specific borrowing tax concessions in relevant jurisdictions (e.g. withholding tax concessions
and other jurisdictionally specific concessions aimed at eliminating tax distortions that can impede global debt
markets).
Often tax opinions are sought by lenders and borrowers as part of the process of seeking to raise finance in order toaddress these and other tax considerations.
6.2.7 Listing agent
If project bonds are listed and admitted to trading on a stock exchange, a listing agent will often be required to liaise
with the relevant stock exchange. Listing on an exchange may bring the issuer within the scope of regulatory regimes
which may impose substantial disclosure and reporting rules, which is outside the scope of this guide.
6.2.8 Registrar
For bonds in registered (not bearer) form (the distinction between the two is outside the scope of this Guide), a bankor trust company is appointed as the issuer’s registrar. The registrar maintains a register of the names of the owners,
or, if the bonds are lodged in a clearing system, the names of the relevant clearing system (or its nominee) which holdthe bonds on behalf of owners, and records any change in legal ownership when bonds are sold. It is worth notingthat for bonds held in a clearing system (which is usually the case for public bonds), the registered owner will generally
be a nominee of the clearing system and this will not change for so long as the bonds remain lodged in that clearing
system (i.e. a sale of such bonds effected through the clearing system will constitute a transfer only of the beneficial
ownership of those bonds through and in accordance with the rules and regulations of the relevant clearing system;
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legal ownership of those bonds will remain with the nominee of the clearing system and accordingly the registrar will
not make any record of any such sale).
6.2.9 All-in cost estimate
As one of its first tasks, an advisor typically prepares a comprehensive estimate of the all-in costs of a loan and/or project bond transaction. These costs, as set out in the pro forma template immediately below, will include
both upfront as well as annual fees incurred over the life of a transaction. The estimate provides the issuer with anannualised all-in cost, as adjusted for the amortisation of upfront fees over the life of the transaction. These costs
would typically include the fixed or floating rate of interest payable and the cost of any interest rate and/or currency
swaps. Additionally, they will encompass the upfront and/or ongoing fees for: arrangement, subscription/underwriting
and placement, credit enhancement, auditors, legal and advisory services, credit rating, trustee, fiscal and paying
agent, listing agent, printing (in some limited cases), SPV management (if used), monitoring advisor (if used), technicalagents, environmental consultants and insurance consultants16.
Figure 12: Illustrative all-in cost template
Bank loan
Upfront

Project bondOngoing bp
per annum

Upfront

Ongoing bp
per annum

Loan or bond couponInterest rate / currency swapNet fixed rate

Arrangement, placement/
subscription/underwriting feeCredit enhancement feeOther agency, advisory or consulting
fees





Issuers’ legal advisors’ fee

Arranger and investors’ /trustee legal
advisors’ fee

Accounting comfort letter andongoing audit costsCredit rating agencies



SPV management fee












Trustee/agent/custodian’s fee

Miscellaneous fees anddisbursements, including printing (ifneeded)

Monitoring advisor’s fee
Total upfront fees (in bppa)























Total ongoing feesAll-in cost, including amortisation of
upfront fees and ongoing fees

16 In some cases, parties will require two sets of relevant experts, acting for the issuer and investor, respectively. Excludes other fees payable, including any fees of the sponsor.

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6.3 Debt private placement issuance process - summary
Although in some ways the steps required to issue a debt private placement are similar to a public bond in terms ofinternal and external compliance and authorisations, the issuance process is more straightforward. While it may still
be prudent to hire an advisor bank, it will usually be in a placement agency (rather than an underwriting) capacity. No
syndicate of banks will be required as the debt will be privately placed to a small number of select investors. The levelof due diligence and disclosure, as well as the contractual terms and conditions (including financial covenants andconditions precedent), are negotiable between the issuer and the investors, making the whole process more akinto the negotiation process for a bank loan. A paying agent or trustee will still be required to carry out administrative
tasks, such as making the payments of principal and interest to investors and performing any ongoing monitoring of
the project.
Investors will be represented by their own legal counsel, who will help to negotiate and draft the documentation, andmay be required to give the investors a legal opinion in both the jurisdiction of the governing law of the documents
and the jurisdiction of incorporation of the issuer. The issuer’s auditors may be required to give investors a “comfort
letter”, as described above.

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7. Marketing, pricing and issuance process

In the case of a bank loan, each bank undertakes credit risk assessment and makes a lending decision, just as is thecase with investors looking to invest in a project bond. Both may depend upon analysis undertaken by due diligence
providers and technical consultants to the transaction. Lending or investment criteria may include minimum ratinglevels from designated credit rating agencies. Once this phase has been completed, the arranging bank will thenfinalise the terms and conditions, and set the pricing based on investor feedback.

7.1 Preparation of offering memorandum or prospectus
The issuer must prepare an offer document – an offering memorandum or a full prospectus (in the case of a publicly
traded bond). If the bonds are to be listed, such offer document can also serve as listing particulars which satisfy thedisclosure requirements of the relevant listing venue.
As well as being a marketing tool, the offer document should contain all information and disclosure which an investor
needs to make an informed investment decision. The issuer is responsible and liable for the accuracy of this document.
The offer document sets out risk factors as well as the bond’s terms and conditions, and financial information on the
project company. It also discloses the role and business of the project company and the contracts it has to mitigate
risks such as offtake agreements. For a PPP transaction, it discloses the nature of the contract the project company
has with the relevant public body. See section 12 (Disclosure and reporting standards) for more discussion on thispoint.

7.2 Roadshow
The arranging bank and project company representatives usually go on an investor roadshow at which they will
present the issuer, the project, the management of the project company, the proposed financing and the risk mitigation
features, and give the investors the opportunity to ask for more information. In the case of a private placement, asimilar but more targeted process aimed at a smaller group of investors would take place. At the project company’s
request, a provisional rating (denoted by a [P] in front of the rating) may be provided by one or more rating agencies
to facilitate the roadshow phase. Typically, each rating agency would also publish a ‘pre-sale report’, setting out its
rating rationale for the project. A definitive rating is typically assigned once the bonds have been issued and following
the agency’s review of final documentation.

7.3 Pricing
From a pricing standpoint, in the case of a bank loan, the reference rate is normally 3-month or 6-month LIBOR,
to which the loan margin is added. A commitment fee (as a percentage of the margin) is charged for undrawn
commitments given that the latter will also incur regulatory capital charges for the banks. In the case of a bond issue,
the underlying rate (reference rate) is the sovereign yield on a fixed rate bond of similar maturity and/or the swap
curve. A credit spread reflecting the perceived risk is added. For a bank loan, the bank syndicate agrees the loan
margin before financial close, although interest rate risk remains unhedged until financial close, or possibly even laterin certain countries. On some privately placed transactions, institutional investors have been able to fix spreads until
financial close. In the case of a public bond issue, the likely spread can only be locked in on the pricing date whenmost or all of the bonds have been placed (subject to limited exceptions), depending on whether the transaction isa best-efforts placement or rather an underwritten transaction. However, in order to ensure deliverability of funding,an appropriate risk-allocation mechanism can be agreed upfront, which may result in the sponsor, the bidder, theinvestors or the procurement authority (or a combination thereof) assuming the risk of any price fluctuations.

7.4 Syndication, book building and allocations
Typically, international public bonds are issued on a syndicated, book-building basis. A similar process takes place for private
placements, but more targeted towards selected investors. An issuer may choose, with the guidance of the arranger, todistribute its bonds through just the arranger or, more typically, a syndicate of banks and/or investment banks, which may
include relationship banks, banks that provide certain geographical coverage or are required for local legal or regulatory

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purposes. If a syndicate of banks is appointed, the arranger
in this context becomes the ‘lead manager’ or ‘lead arranger’.
There is a prestige factor for banks being included in a
syndicate (if a distribution syndicate is created). While
there is no prescribed maximum, in most cases only asmall number of syndicate banks should be required toensure successful execution, collection of bond orders andallocations. Issuers should set very careful engagement rules
when appointing syndicate banks in terms of establishingroles and responsibilities, overall accountability and fees.
In terms of constructing the investor order book (‘bookbuilding’) and deciding upon allocations to investors,
following the financial crisis there has been a marked increase in demand for bond issues that has not beenmatched by an increase in available supply. This has resulted in order books for new issues being frequently heavily
oversubscribed, with scores and sometimes hundreds of investors placing orders before order books close. Leadmanagers allocate new bonds on the basis of any specific issuer priorities (for instance, trying to expand the investor
base into new sectors or geographical regions), as well as according to their own internal allocation policies andprocedures. Issuers often invest considerable time and effort in investor relations and, where there has been aroadshow, may be keen to see to what extent that has led to actual orders. When deciding how to allocate the bonds
in response to the investors’ orders, specific considerations include early, proactive and useful investor feedback onwhat the transaction size/yield could be, track record of investing in the issuer (if appropriate), sector or type of issue
concerned, likely holding horizon, and available explanation of unusual order sizes (in order to identify and avoid orderinflation which can skew the allocations). Such factors need to be considered in the context of constantly changing
market dynamics, often involving subjective judgments.

7.5 Timeline
The arranger prepares a timeline of the transaction marketing process. This is likely to include a timeline for the ratingprocess, which must be substantially completed prior to starting the marketing process, to ensure that provisional
ratings can be assigned at the time when the marketing phase launches. Rating agencies typically need a four to six
week window to undertake a provisional rating engagement. In some complex projects cases, this can take several
months. However, they can start well in advance of financial close by working with draft project documents, maturefinance term sheets, pre-audit financial models and draft reports from advisors.
Typically, the issue process for a syndicated bond is as follows:
Closing date minus 25 days:
Provisional ratings received from credit rating agencies. Documentation is drafted (although typically drafting of the
documentation starts well-before provisional ratings are obtained).
Closing date minus 15-20 days:
Lead manager distributes the offering memorandum or preliminary prospectus and marketing materials to potential
investors, and sets up group and individual meetings in cities where key investors are based, as appropriate.
Closing date minus 10 days:
After receiving investor feedback, the lead manager proposes ‘price talk’ to the issuer, with the official book-building
process to commence immediately afterwards. Investors confirm orders at a specific price. Price talk will typically bein the form of an agreed spread over an agreed benchmark reference rate such as a Treasury bond. If necessary, thelead-manager and arranger can revise or refine the “price talk”.

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Closing date minus 5 days:
The bond is “launched”: marketing process stops; transaction size, issue price and coupon are finalised. Final
allocations are made to investors through the “book-building” process.
Documentation is finalised, conditions precedent documents and certifications are prepared by the issuer.
Transaction documents are then signed, conditions precedent documents are delivered and “bring-down” duediligence processes are completed.
Closing date:
Final, “bring-down” conditions precedent documents are delivered. Due diligence processes are updated. Funds
from investors are transferred to the issuing and paying agent, for onward transfer to the issuer. Bonds are released
to investors through a depositary, which holds bonds on behalf of investors.

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8. Project bond investor baseIn addition to traditional commercial and development bank lending, institutional capital has been increasingly active in funding
infrastructure debt over the past decade given the long dated, often inflation-linked nature of the asset class. Investment
objectives differ by investor type and often project financing solutions require cooperation between several groups of investors.
Capital pools from non-bank institutions such as insurers, fund managers and pension funds funded by long-dated
savings products (often called ‘real money’ investors) have increased significantly within Asia over the past decade ascompulsory and discretionary saving has developed along with rising consumer affluence. Average savings levels in
Asia are typically higher than Western markets. The Japanese pension market ranks in the top 3 globally, South Korea
ranks within the top 10 and China’s pension market is developing rapidly and looking to diversify into new investmentareas17.
Whilst investment strategies will vary by institution, the investor universe can be categorised according to a shortlist of
key considerations such as: i) listed vs. unlisted securities, ii) investment grade vs. non-investment grade credit ratings, iii)
greenfield vs brownfield projects, iv) funding currency (domestic vs G3 currencies, namely USD, EUR, JPY), and v) tenor.
Some of the largest investment institutions with experienced credit staff are able to serve as lead investors; a bespoketransaction can be designed to fit their specific investment requirements. From a relative value standpoint, institutional
investors review a large number of investment opportunities and will expect additional return for specific features of an
instrument, such as illiquidity of the issuance. However some investors will simply not invest if certain risks cannot be
mitigated to their satisfaction.
A key difference between bank lenders and institutional investors is the willingness of the former to be actively involved
with the issuer and the project company, and to deal with the ongoing issues of the greenfield construction phase( inparticular, engineering, procurement and construction risks), albeit with notable and ever more numerous exceptions.
As a result, project bonds require more resources from the investor than holding sovereign or corporate bonds.

8.1 Classification of Infrastructure Investors
Insurance companies: Life insurers have become increasingly active in investing in infrastructure debt products
given the need for long-dated assets to offset long-dated liabilities from their life books. Life insurers have historically
predominantly invested through fund managers; however larger institutions are increasingly looking to build thecapability to invest directly, to reduce fees. These large insurers may also manage third-party money as well as
managing collective investment funds.
While life insurers may be comfortable holding long-term bonds, they invest across a broad range of sponsors
including project companies, corporates and sovereign debt; therefore project bonds must compete with these otherassets in terms of relative value or yield, liquidity, and other features such as early redemption provisions. Typicallyinsurers will look for an ‘illiquidity premium’ from infrastructure debt products, delivering a spread over the relevantbenchmark yield. For the same reason, life insurers may also target lower rated investment grade bonds (eg BBB+ to
A ratings) in order to maximise yield. This is an important consideration for project sponsors where credit enhancementfrom a development bank may reduce the cost of issuance but also limit the pool of potential institutional investors.
Pension funds: Similar to life insurers, pension funds have long-term liabilities (future pension payments) and soare attracted to long-term bonds that yield a higher income than sovereign bonds. Traditionally, however, some havepreferred to invest in project equity rather than project debt.
Specialist infrastructure funds: A number of fund managers specialise in managing infrastructure debt on behalf of third
party investors. For smaller pension funds and other ‘real money’ funds, infrastructure debt funds may be the most costeffective means of entering the infrastructure investment space given limits on institutional resources to review and manage
investments. Funds provide institutional investors diversification benefits across country, sector and sponsor risk. One
consideration for infrastructure funds in Asia is funding currency. Typically funds are denominated in US Dollars given they
comprise investors from a number of markets; therefore investors will need to consider currency risk of the underlying projects.
17 Source: Global Pension Asset Study 2015, Tower Watson

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Sovereign wealth funds: Sovereign wealth funds have liabilities of uncertain duration since it is not generally known
when they will have to make payments to support the nations that own them. To date, they have been less active
in investing in infrastructure debt than infrastructure equity, where a number of SWFs have been very active, to theextent of building up investment teams to manage fund investments and, increasingly, direct investment programmes.
Government & official agencies: Governments may finance infrastructure assets directly, but typically only when there
is not a well-established legal framework for private ownership, where privatization is seen as politically unacceptable orwhere the infrastructure asset itself provides a social need but has low probability of generating acceptable investor returns.
Governments (and lower-tier public authorities) also provide partial financing and guarantees, alongside private sector
financiers. Export credit agencies (ECAs) are active providers of funds for projects which benefit domestic companies,
typically projects with a high level of capital equipment or where foreign EPC companies can play a leading role.
MDBs (such as the ADB, the IFC and the AIIB) provide direct financing, as well as credit support in the form of credit
enhancement.18 MDBs are very active in Asia where private capital markets and local commercial debt markets areless mature.
The following tables provide examples of fixed income and equity investors that have participated in recent infrastructure
financing transactions. These are global lists, so not all investors will invest in Asian transactions.
Figure 13: Examples of fixed income investors in global infrastructure projects:
Aegon Investment Management

Edmond de Rothschild

Munich Re Investment Management

Abu Dhabi Investment Authority

Fidelity

National Pension Service of Korea

Aerzteleversorgung Westfalen Lippe

Generali

PGGM

Ageas

Goldman Sachs Asset Management Pictet Asset Management

AIG

Government Pension Fund (Norway) Pioneer Investment Management

AIA

Hastings

Pramerica

Allianz GI

HSBC Asset Management

Private Wealth Management London

AmundiIFM Investors

R&V Inv Frankfurt

APG

Insight Investment Management

RivageAviva investors

JPMorgan Asset ManagementSCOR

AXA Investment Management

Korea Investment Corporation

Sequoia

Blackrock

La Banque Postale AM

Standard LifeBlueBay Asset Management

Legal & General

Swiss Re

Brookfield Asset Management

MACSF

Temasek Holdings

BWVA

Macquarie Investment Management

Union Invest

Carmignac Gestion

MetlifeWestbourne

Deka Investment

M&G

Zurich Re

Deutsche Asset & WealthManagement

MUNICH ERGO Asset Management

Source: ASIFMA members.

18 As defined in section 3

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Below are examples of global infrastructure equity investors. Some of these investors might not be active in Asia.
However, the list shows the broad range of investors active in this market globally.
Figure 14: Examples of equity investors in global infrastructure projects:
3i

British Columbia Inv Mgt Corp

InfraRed

Abu Dhabi Investment Authority(ADIA)

Brookfield Asset Management

I Squared Capital

Alberta Investment Management
Corp

Canada Pension Plan Investment J.P. Morgan Asset Management
Board

Alinda Capital Partners

Colonial First State

Kohlberg Kravis Roberts

Amey

DIF

La Caisse de Dépôt et placement duQuébecAntin Infrastructure Partners

Energy Capital Partners

Macquarie Infrastructure and Real
AssetsAMP Capital

Energy Investors Funds

Meridiam

APG Asset Management

EQT

OMERS

Arc Light Capital Partners

Future Fund

Ontario Teachers Pension Plan

Arcus Infrastructure Partners

Government of Singapore Investment QIC
Corporation (GIC)

ARDIAN

GoldmanPartners

Bilfinger

Global Infrastructure Partners

SteelRiver Infrastructure Partners

BlackstoneHighstar Capital

UBS Global Asset Management

Borealis

Industry Funds Management

Universities Superannuation Scheme

Sachs

Infrastructure RREEF Infrastructure

Source: Infrastructure Investor and ASIFMA members.
In addition to financial investors, construction companies and strategic players may invest in directly into infrastructure
projects. Examples of these types of investors include Cintra, Globalvia, Iridium, Bouygues Construction, Veolia, Suez
Environnement and IL&FS.

8.2 Ongoing investor relations
Generally, in addition to the initial roadshow market process described in section 7, investors will encourage as
much regular contact as possible between the issuer, the project company and themselves, including non-dealroadshows, deal roadshows, conferences, direct updates and equity communications. Reporting typically includes:
liquidity profile, debt facility usage, business operations, strategy, business evolution, outlook, ratings, targets andcommitments. The issuer, however, must take care to comply with relevant rules with respect to inside information.
Although the investor relations process takes time, the information gathered can be used to update the investors’ models
on long-term risks, credit, strategy, industry trends, forecasts, models and, ultimately, investment recommendations.
The consequences might lead an investor to maintain, increase or reduce its holdings. Additionally, it might encourage
secondary market activity and help with new issue processes.

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9. Key considerations for investors

Investment in project finance debt can present potentially attractive investment returns to institutional investors
if sufficient resources are available to analyse the various risks and rewards, as well as to monitor the ongoing
performance of transactions. Included on any investor’s checklist should be:• Key risks (including usage, cash flow, legal, environmental, regulatory, political)• Early redemption features• Relative value/pricing as against other similar investments• Any secondary market liquidity requirements• If needed, ability to obtain a periodic market valuation of the bonds for accounting, regulatory or internal purposes
One of the most material risk factors in project finance debt from the point of view of both banks and project bondinvestors is revenue risk, or the risk that either expected volume and/or price will not be achieved going forward. In
some instances, oil and gas as well as power generation plants may mitigate this risk by way of off-take agreements,
although this may reduce expected returns to shareholders. In the case of a PPP project, this risk can be mitigatedthrough an availability-based payment contract. However, if a public authority is unwilling to provide an availability
contract, or to retain some level of volume or usage risk – on a new toll road for example – financing the project islikely to be more difficult. Investors may be willing to take some risks between an agreed minimum or maximum levelof usage, but they are unlikely to be prepared to take all of the risk. Public authorities can, for example, guarantee
minimum revenue payments to project companies through ‘cap and collar’ agreements. These guarantee a minimum
revenue commitment to the project company (a floor), which is offset by a cap agreement by which revenue above
the cap accrues to the public authority.
Of the risks directly related to regulatory and political issues, the key concern for investors is the risk of project tariff
revenues declining significantly after the financing of the transaction has closed. This will, of course, adversely impact
the credit risk as well as the market value of their investment. A move towards transparency – as well as consistency– on the part of regulators and public sector authorities with regards to maintaining tariff-setting and/or regulatory
controls post-financial close of a transaction, as well as a review of their past practice of tariff reviews, including
retrospective changes to tariffs against a variety of asset classes/projects, would help to assuage investors’ concerns
over the regulatory risk associated with the underlying revenues of the project. It should be noted that many, but not
all concession documents include some relevant protections (for example, provisions regarding changes in law).
Other regulatory or political risks include events that could have a materially negative impact on the viability of the
project, such as an aggressive interpretation of the terms of the concession agreement by the public sector authority,or their ability to defer or amend the termination payments agreed under the contract in the event of termination orcancellation of the project.
From a credit risk evaluation standpoint, although many (if not most) transactions are rated by a credit rating agency,
investors should also have staff who have familiarity with project finance transactions so they can complete their own
due diligence and credit review processes.

9.1 Bank for International Settlements project finance factors
The Bank for International Settlements (BIS) suggests five factors for consideration by investors in project finance(infrastructure) debt – a type of debt that they classify as ‘specialised lending’ – that are listed below. While thislist is primarily intended for banks evaluating the risks of project finance loans, it also offers a useful framework for
infrastructure investors.19
The first BIS factor is financial strength. This factor depends on market conditions (competitive and market strengthof the project company), the financial ratios including Debt Service Coverage Ratio, and stress analysis to determine
19 Annex 6 of the Basel Committee on Banking Supervision’s International Convergence of Capital Measurement and Capital Standards provides further detail of the rating grades for each of
the five factors (http://www.bis.org/publ/bcbs128.pdf)

ASIFMA–ICMA Guide to Infrastructure Financing in Asia37

if the project can meet its financial obligations under adverse
economic or sector specific conditions. It then considers thefinancial structure of the project company and, in particular,
the duration of its borrowing relative to the project life andthe amortisation schedule.
The second factor is political and legal environment. Thisfactor includes political risk, force majeure risk, the degreeof government support and the project’s importance for thecountry, the stability of the legal and regulatory environment(risk of change in law), and enforceability of contracts etc.
The third factor is transaction characteristics. This factor includes design and technology risks, completion
guarantees and track record of the contractor. It also includes operating risk, off-take risk and supply risk.
The fourth factor is strength of sponsor. This factor depends on the sponsor’s track record and also the extent ofsponsor support.
The fifth factor is the security package. This factor covers assignment of contracts and accounts, pledge of assets,
cash sweeps, escrow accounts, covenant package, dividend restrictions, reserve funds etc.
In the context of Asian infrastructure projects since the 1997 crisis, the political and legal environment – the second
factor listed above – represents one of the biggest challenges for investors. The other factors – financial strength;transaction characteristics; strength of sponsor; and security package – remain as relevant in Asia as always and as
elsewhere, but the political and legal environment represent a unique challenge in Asia in four key areas.
1. A dearth of investable assets.
2. Dominance of bank financing.
3. Changes in political stability.
4. Legal enforcement of contracts.

9.2 Dearth of investable assets
The dearth of investable projects in Asia is the other side of the so-called “Asian savings glut” coin. High Asian savings
rates led to large current account surpluses and the dramatic increase in foreign exchange reserves among Asiansovereigns following the 1997 Asian crisis. The lack of investable projects and the structural preference for current
account surpluses and the consequent build-up of foreign reserves that went along with it meant Asian savings werechannelled into low-yielding developed market assets, primarily US Treasuries, rather than invested in infrastructure
assets at home.
The build-up of current account surpluses and foreign exchange reserves may have been an appropriate responseto the 1997 crisis, but the two-sided coin of an Asian savings glut and a dearth of investable Asian assets havecompounded the response to the global financial crisis of 2008. Excess Asian savings increase the supply of capital
globally while the dearth of investable assets decreases the demand for capital. The net effect is downward pressure
on interest rates. The price of capital – expressed in interest rates – has fallen due to excess Asian savings (supply of
capital) and insufficient Asian investment projects (demand for capital). The low interest rate policies of central banks
in the developed economies have accentuated this downward pressure on global rates.
Asian sovereigns should consider expanded government spending on infrastructure projects both as direct fiscal
outlays and as part of public-private-partnerships. The post-1997 “Washington Consensus” solution to the Asian crisis
encouraged current account surpluses and a build-up of foreign exchange reserves which effectively suppressed
domestic investment spending, including on infrastructure. An appropriate balance to increased fiscal spending and
38

ASIFMA–ICMA Guide to Infrastructure Financing in Asiasound public debt management should be adopted. The European Monetary Union’s “Maastricht criteria” of a 3%
limit on a country’s fiscal deficit and a 60% of GDP cap on public debt could be a good place to start. The Maastricht
criteria were observed largely in the breach in Europe, but most Asian sovereigns are prudently well below the criteria.
Increasing Asian investment, while keeping Asian public finances within the Maastricht 3% and 60% limits, offers apotential solution to the dearth of investable assets in Asia.
Asia governments and multilateral development banks (including the AIIB) is expected to design funding structuresthat align the interests of private investors and public authorities while optimizing the use of their balance sheet andminimising crowding out private capital.

9.3 Dominance of bank financing
Reliance on bank lending throughout the life of a project will subject projects with refinancing risks in a rising rateenvironment, which can be reduced by long term fixed financing from the institutional investors. It will also prevent thedevelopment of a multi-tiered financial system in Asia with deep capital markets for both bonds and equities.
For the Asia Pacific region, there is also a recognized need to develop local currency capital markets and promote
intra-region capital flow.

9.4 Political stability
The change of governments in Asia slows the pipeline of investable infrastructure projects. Elections in Asian
democracies, coups in other states, and general political transitions have a pronounced tendency to delay
infrastructure investment. This would include delayed execution of already approved and “shovel-ready” projects.
Even in the absence of a change in governments, Asian sovereigns have demonstrated a tendency to actually underspend on approved and budgeted investment projects. There is a pronounced need for increased political stability
within and across governments in emerging Asia. One way to address the political risk or concerns is to have thepolitical risk insurance coverage or credit enhancement that helps upgrade the credit rating.

9.5 Legal enforcement of contracts
The legal enforcement of contracts and creditor rights has also been a deterrent to expanding the universe ofinvestable infrastructure projects in Asia. Legal structures tend to favour domestic players, but even within the context
of the domestic court system, enforcement of contracts is problematic.

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10. Credit enhancement alternatives

Structuring a bond or bank loan to achieve a higher credit rating is likely to broaden the investor base, which in turnshould lower the overall transaction costs for the project company and enhance value-for-money considerations.
While capital markets investors have differing risk appetites, many only invest in investment grade transactions (inmost cases, based on a rating provided by a credit rating agency, but also as may be judged independently by theinvestor). The size of the investor market for investment grade debt is much larger than for high yield/non-investment
grade debt ― and within investment grade the investor market for single A debt is larger than for BBB-rated debt.
The rating of the debt can be improved by support provided in respect of the obligations of counterparties to theproject. For example, constructors and operators may provide corporate instruments or guarantees from creditworthy
entities, bank letters of credit, adjudication bonds or performance bonds to support their obligations under the project
documents. The providers of such support instruments will have recourse to the relevant contractor, and not to theproject company. Similarly, sponsor commitments to provide contingent equity if certain of the assumptions in thebase case fail to be met, or in other clearly defined circumstances, would also be credit positive.
As described below, credit enhancement for senior debt can also be provided through the use of subordinated debt
in the capital structure of the project. In addition, credit enhancement may be provided by external parties who are,directly or indirectly, taking project risk and would have a claim on the project company if they are required to pay out.

10.1 Credit enhancement through the capital structure
The addition of layers of subordinated capital can enhance the credit rating of the senior debt. For example, if there
were 25% equity (1st loss), 15% subordinated debt (2nd loss) and 60% senior debt in the capital structure, 40% of
the initial capital could be eroded before the senior debt suffered any loss. In this way, one part of the capital structure
provides credit support for another. There are now two classes of debt with different risk/return profiles.

10.2 External credit enhancement
External credit enhancement typically reduces the risk that a project company defaults during its construction phase
and/or during its operations phase. This can be achieved in three ways, all of which involve paying a fee to a third
party:
1. Bank liquidity: A bank may provide a liquidity facility (which could be in the form of a letter of credit, although these
are not as widely available as in the past). In return for a fee, the bank will fund temporary shortfalls in cash flow,
up to a certain amount or percentage of project value. A letter of credit protects creditors from temporary cash
shortfalls, so mitigating the risk of a default from cash flow shortfall. Repayment of such facilities, if drawn, may besuper-senior (i.e. ranking above senior debt).
2. Private or Public Sector Guarantees: A guarantee enhances a credit obligation by offering the guarantor’s credit
profile in addition to the obligor’s, or instead of it. This lifts the project company’s credit rating because theguarantor tends to be a more creditworthy entity. Credit substitution (as distinct from enhancement) can result
from unambiguously worded guarantees, which oblige the guarantor unconditionally and irrevocably to pay or
perform on a full and timely basis, without the ability to defend its liability. A guarantee might be provided by aninsurance company, a sponsor (if it has a suitably high credit rating), a bank, an MDB or a sovereign government.
Such guarantee might be either partial or in full.
3. Sovereign Guarantees: Guarantees or letters of credit, although rare for greenfield PPPs, may be available fromnational governments (or sub-national authorities) in return for a fee. As with private sector guarantees, the projectcompany pays an annual premium for credit enhancement and, therefore, a ratings uplift. They are ‘cheaper’ in theirown right only if they build in an inherit subsidy directly (i.e. the guarantor doesn’t charge (fully) for the risk it takes) orindirectly (i.e. the guarantor’s recourse/indemnity is against a third party balance sheet of a better credit quality).
A government guarantee on all of the debt may confer credit substitution, with the resulting debt becoming
effectively sovereign debt. It would be likely to trade at a small (yield) premium to actual sovereign debt, if only toreflect possibly lower liquidity.
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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

4. Asian Development Bank credit enhancement:
In February 2014, the ADB announced an initiative
aimed at supporting the use of project bonds throughcredit enhancement both in USD and local currency.
In February 2016, ADB signed the first project bondfinancing under the new initiative.
• Local currency credit enhancement
For local currency project bonds’ credit-enhancement,
the ADB can provide a partial credit guarantee (“PCG”)(typically up to a maximum of 75%) of the principal of thebonds and interest thereon. By virtue of the AAA/Aaa/
AAA credit rating of ADB, the amount covered by ADB’s
PCG will be zero weighted in the hands of investors
holding the bonds under most (if not all) regulatorymodels, and for bank investors, this presents theadvantage that most regulators (if not all) will consider
the amount covered by ADB’s PCG as exempt for
single borrower limit reporting. The latter feature makes
this product particularly attractive in jurisdictions wherebanks are the main investors in bonds and where exposure limits to the most recurrent sponsors/developers areconstrained.
• USD credit enhancement
For USD project bonds, the ADB can offer a subordinated (vis-a-vis the senior bonds) liquidity facility which
could take the form of a revolving irrevocable letter of credit for a fixed percentage of the value of the bonds.
Such subordinated liquidity facility is now a proven model in the European context with investors, arrangers,
governments and rating agencies, resulting in a one to three notches uplift from the underlying project rating
depending on the percentage (typically up 20% but can go up to 25%) of support provided by the AAA/Aaa/AAA
credit enhancer.
• Green and Climate Bonds
ADB has also promoted certification for Green bonds and Climate Bonds, allowing the investors to assess thebonds’ environmental integrity on a common set of standards based on third party review. The Tiwi-Makban
project bonds (refer to appendix E) are the first Climate Bonds certified in emerging markets.
5. Credit Guarantee and Investment Facility• 5.1	Local currency bond guarantees
The Governments of the Association of South East Asia Nations (ASEAN), China, Japan and Korea together with
the ADB established the Credit Guarantee and Investment Facility (“CGIF”) as a key component of their Asian
Bond Markets Initiative to increase the supply of local currency bonds in the region. Recognizing the importanceof fixed rate long term funding in matching currencies to help make infrastructure projects more robust, the work
undertaken by CGIF to develop local currency bond markets forms the foundation for the use of project bonds infinancing infrastructure.
Underpinning CGIF’s irrevocable and unconditional “full-wrap” guarantees are its strong credit worthiness andexperience in assessing and structuring projects. By instilling confidence in project bonds as a starting point
through its “full-wrap” guarantees, CGIF aims to attract conservative long term bond investors in the region toensure that project bonds become a key part of their fixed income portfolios in addition to sovereign and corporate
bonds.
In addition to the “full-wrap” guarantee, CGIF has recently launched a Construction Period Guarantee (“CPG”)
to further encourage long term bond investors to support green-field infrastructure projects. This facility andthe methodology to assess and manage construction risks are aimed at helping investors frame and addressconcerns relating to greenfield projects, all of which is more fully described in Appendix F.
ASIFMA–ICMA Guide to Infrastructure Financing in Asia

41

Figure 15: In 2015, USD2.2 billion of guarantees were provide by international developmental financial
institutions (IDFI).
IDFI

Direct lending

Guarantees

ExposureTotal

1 JBIC/Nexi/DBJ

3,128

455

3,580

8,692

2 IFC/MIGA/Clean Tech Fund/ICF

1,686

934

2,620

4,672

3 EBRD

1,903

-

1,903

3,784

4 KEXIM/KEIC/Ksure/KDB

1,164

-

1,164

2,632

5 IADB

1,084

-

1,084

2,285

6 China Eximbank/CDB/Sinosure

500

365

865

1,915

7 Asian Development Bank

785

-

785

1,364

8 US Ex-Im

595

-

595

895

9 OPIC

546

-

546

792

10 EDC

490

-

490

875

11 Export Finance & Insurance Corp
Australia

450

-

450

800

12 KfW/Hermes/DEG/UFK

416

-

416

1,105

13 Coface/Proparco/AFD

103

267

370

415

14 Sace

167

137

304

828

15 Black Sea Trade Development

256

-

256

581

16 FMO

217

-

217

300

17 EIB

183

-

183

355

18 NIB

100

-

100

100

19 Islamic Development Bank

70

-

70

70

20 North American Development Bank

62

-

62

62

21 Export Credit Norway

45

-

45

90

22 OPEC

45

-

45

45

23 African Development Bank/BDEAC/
African EXIM

37

-

37

37

24 DBSA

35

-

35

35

25 CDC

20

-

20

40

26 Central American Bank for Economic
Integration

15

-

15

15

14,102

2,158

16,25732,784

Total

Source: Project Finance International, January 27, 2016

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

Edited by

11. Credit review processes

Credit committees of banks, investors and credit rating agencies all need to carry out comprehensive assessmentsof an infrastructure project’s credit risks, performing extensive due diligence and undertaking credit reviews. In doing
so, they generally require more information than that included in an offering memorandum or prospectus. One or morecredit rating agencies may be engaged to rate a project.
It should be noted that banks, credit rating agencies and investors have a different perspective to the sponsor whenevaluating transactions. While the sponsor’s management typically focuses on the project’s upside potential, debt
providers do not benefit from upside performance, and hence banks and credit rating agencies focus on the project’s
key risk factors, including downside risk.

11.1 Credit rating agency considerations
Ratings are intended to exhibit stability within normal economic cycles rather than reflect short-term changes tomacroeconomic conditions. Credit rating agencies consider the project’s risk profile throughout its whole life, and the“weakest link” in the project may limit its rating.
In general terms, credit analysis will include consideration of construction phase risks and operational phase risks,and factors that will affect an issuer’s long-term ability to meet debt payments such as major economic downturns or
major regulatory developments.
More specifically, assessing a project’s credit risk involves analysing the potential risks that may impact a projectthroughout its life; the contractual arrangements that allocate risks to the various project and finance parties and theability and willingness of those parties to perform their obligations; the nature of residual risks retained by the projectcompany and structural features including any credit enhancements that might mitigate those retained risks; and anyother relevant considerations, including areas of subjective judgment.
For an operational project, the main potential problems in any project are, firstly, technology and operations issues (costoverrun, a failure of technology, operational underperformance) and, secondly, problems in the input and output markets
in which the project company operates (hedge mis-matches in areas such as fuel costs and market exposure in theform of volume risk or price risk). It will also be necessary to review possible structural risks (the demise of a parent
company or counterparty) and counterparty/regulation factors (for example, off-taker problems, failures of government
to support a project contrary to expectations, tariff regulation changes, emissions regulation impositions or changes).
For projects exposed to construction risk, relevant credit considerations will also include project construction
complexity, constructor/consortium experience and project readiness, resilience of the constructor to cost overruns,
and the resilience of the project to construction schedule overruns.
In a PPP project, the allocation of construction risks between the private sector and the public sector is a central issue.
An important analytical focus is understanding the drivers of cash flow generation and, in particular, the predictability
and sustainability of cash flow in the event of an economic downturn. Naturally, construction phase risks can bevery different from the operational phase’s risks. In the construction phase, the risks relate to technology, design,
construction and adequacy of financing. In the operational phase, the greatest risks are performance risk, market risk,
country risk and refinancing risk.

11.2 Credit rating agency methodology
Credit rating agencies publish rating methodologies/criteria that provide guidance on the relevant agency’s rating
approach for project finance and infrastructure transactions, and must assign credit ratings in accordance withthose published rating methodologies/criteria. Different rating agencies have different rating methodologies/criteria,
including the use of notching adjustments and relevant terminology. These publications are freely available on agency
websites, and rating agencies are typically very willing to discuss their rating approach for potential transactions andto illustrate their views with reference to relevant rated precedents.

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

43

As an example, Moody’s Generic Project Finance Rating Methodology considers as key rating factors: (1) longterm commercial viability and competitive position, (2) stability of net cash flows, (3) exposure to event risk, and(4) key financial metrics. This methodology incorporates notching factors to reflect a project’s relative strengths or
weaknesses in relation to liquidity arrangements, project finance structural features, and exposure to refinancing risk.
The methodology also provides guidance on how construction risk and ramp-up risk (which may affect revenues
following construction completion but before the project has established steady-state operations) will be considered.
Sovereign-related considerations are also relevant but tend to be discussed in separate rating methodologies/criteria
given their relevance to a wider range of rated entities and sectors.
Figure 16: Key Considerations for PPP Projects:
PPP Greenfield Phase

PPP Brownfield Phase

1. Allocation of construction risks between the private 1. Complexity of Project Operations and Performance
Regimesector and the public sector
2. Strength of Contractual Arrangements and Operational
Approach

2. Project construction complexity
3. 
Constructor/consortium
readinessexperienceandproject

4. Resilience of constructor to cost overruns

3. Performance and Quality of Sub-contractor
4. Leverage and Coverage

5. Resilience of project to construction schedule overrun
As another example, Standard and Poor‘s (S&P) credit ratings for projects reflect its view of the overall relative
creditworthiness of a project finance, which encompasses the likelihood of default, payment priority, and credit
stability within a project finance structure. S&P’s multistep process for assigning an issue credit rating to each debt
consists of establishing the project’s stand-alone credit profile (“SACP”), which is the lower of either its assessment of
the project’s construction phase SACP or operations phase SACP. If construction risk is not present, the operations
SACP determines the project SACP. The process factors in any weaknesses in the transaction structure due toparent linkages or structural deficiencies, cross-default and debt acceleration linkages, as well as any extraordinary
timely government support and sovereign risk. It adjusts for any full credit guarantees, such as a financial guarantee
provided by an insurance company.· It determines the project finance credit ratings for senior debt and, if present,
any subordinated project finance debt.

11.3 Credit rating agency oversightSince the global financial crisis, the regulatory oversight of credit rating agencies has increased worldwide. Similar
to the US and in Europe, credit rating agencies are under supervision in Asian countries by their respective local
regulators such as the Securities and Futures Commission in Hong Kong and the Monetary Authority of Singapore.
In general, supervision requirements relate to, among other things, the business conduct of credit rating agencies
and measures to avoid conflicts of interest, so safeguarding the independence and quality of credit ratings and rating
methodologies.

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

A summary of the main rating agencies’ credit scales follows:
Figure 17: Main rating agencies credit grades:
Rating grade description(Moody’s)

Rating grade description(Moody’s)

Fitch

S&P

Moody’s

AAA

AAA

Aaa

Lowest level of credit risk

AA+
AA
AA-

AA+
AA
AA-

Aa1
Aa2
Aa3

Very low credit risk

A+
A
A-

A+
A
A-

A1
A2
A3

BBB+
BBB
BBB-

BBB+
BBB
BBB-

Baa1
Baa1
Baa3

Moderate credit risk

BB+
BB
BB-

BB+
BB
BB-

Ba1
Ba2
Ba3

Substantial credit risk

B+
B
B-

B+
B
B-

B1
B2
B3

High credit risk

CCC+
CCC
CCC-

CCC+
CCC
CCC-

Caa1
Caa2
Caa3

CC
C

CC
C

Ca

In or very near default, with someprospect of recovery of principal
and interest

DDD
DD
D

8D
D

C

In default, with little prospect forrecovery of principal or interest

Investment grade

Speculative grade

Low credit risk

Very high credit risk

11.4 Credit review checklist
A summary of typical credit review considerations used by banks, investors and credit ratings agencies is provided
in Appendix D.

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12. Disclosure and reporting standards

In the case of an information memorandum preparedfor purposes of loan syndication, there are no legal or
regulatory requirements in respect of the format andstandard of disclosure, which are driven largely bymarket practice.
Bonds, on the other hand, tend to have moreprescriptive disclosure standards. A prospectus forlisted project bonds has to comply with the disclosure
requirements of the listing rules of the relevant stock
exchange on which the bonds are to be listed. Listing
rules of different stock exchanges vary for bonds
offered to sophisticated and professional investors(as would typically be the case for project bonds).
For example, the EU Prospectus Directive applicableto listing on a European exchange is generally moreprescriptive in terms of prospectus format anddisclosure standards as compared to the applicablelisting rules of the Singapore Stock Exchange.
Even if the bonds are unlisted, market and investor expectations for an international bond offering in Asia means that,in practice, the standard of disclosure between a listed bond and an unlisted bond does not differ significantly.
As such, any offering memorandum or prospectus (whether listed or unlisted) must contain all the relevant informationand disclosure the investor needs to make its decision to purchase the bonds and finance the project. Suchinformation and disclosure will include:• An overview of the project, transaction and financing structure;• A description of the key risks in the project;• How the proceeds of the bonds being issued are to be used;• A description of the issuer, the shareholders and any credit enhancement provider;• Financial statements of the issuer and any credit enhancement provider;• A description of the terms of the bonds, the financing, the development, any concession and/or offtake contracts;• A description of the relevant tax rules; and• Information relating to the project financial model.
The market in which the bonds are being offered is also relevant in determining disclosure standards. For example, if
the bonds are being offered to “qualified institutional buyers” in the US based on the safe harbour offered under Rule
144A, the standard of disclosure is generally held to the same or similar standard as if it is a registered offering madeto US investors generally.
Satisfying the required standard of disclosure may potentially be challenging if the project is in a sector where
information is highly sensitive and confidential (for example, a project in the defence sector).
After a bond transaction is priced and all of the documentation signed and closed, every funder and credit rating
agency will want to receive regular reports on the subsequent performance of certain aspects of the project. The
reports and information provided typically include:• Audited financing statements of the project company, any other material project party (such as an EPC contractor)
and any credit enhancement provider

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

• Annual budgets and updates to the financial model• Compliance certificates confirming financial ratio levels and no defaults• Periodic progress reports during both construction and operating phases• Event-based disclosures such as non-payment of interest or principal, breach of contractual obligations, illegality,
default of a major contract counterparty, insolvency event, regulatory/policy changes, construction delays,significant deviation from projected costs and cash flows, or ”force majeure” that affect the economic value of the
project.
There is no consistency as to the standards and format of on-going reporting for projects in Asia, although somebanks, investors and credit rating agencies will have developed their own templates for reporting.
Ongoing reports and information have to be made available to bond investors; this is typically done through a projectagent or on a designated website.

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

47

	Appendix A: Examples of Project FinanceTransactions in 2015

Examples of global Project Finance Deals completed in 2015
IDFI
Project

Country

Cost

Debt

Involvement

Shah Deniz II

Azerbaijan

-

960

560

EBRD, ADB and BSTDB loans

Quequen grainterminal

Argentina

-

33

16

FMO loan

Pan American
EnergyArgentina

-

520

120

IFC

Cia Siderurgica
Pecem

Brazil

-

2,020

910

Kexim

Agea corporate
loan

Brazil-85

85

IADB loan

Seaborn
Networks

Brazil

500

267

267

Coface coverPuma pulp mill &KlabinBrazil

-

250

250

NIB and IADB loans

Itua Unicbanco
renewables

Brazil

-

100

100

IFC loan

Bibiyana II

Bangladesh

-

210

210

ADB, IFC and IsDB each provided
US$70m loan

Cidade deSaquarema
FPSO

Brazil

-

1,550

567

Nexi cover and Sace loan

Tartaruga MV29
FPSO

Brazil

-

1,263

252

JBIC direct loan

Sonker Bunker

Egypt

417

260

200

IFC and EBRD loans

Minera Valle

Chile

-

75

40

EDC

110MW Cerro
Dominador solar

Chile

1,200

940

216

KfW providing US$120m; CTF
providing US$66m; and IADB’s C2F
providing US$30m

Druk hydroBhutan

183

174

120

ADB loan to sponsor and US$70m
project loan

Providencia solar

El Salvador

-

88

88

IDB or IDB-administered loans

4G highways

Colombia

-

1,200

158

Inter-American Development Bank loan

Negev solar CSP

Israel

1,000

800

420

OPIC and EIB

Western
GreeceMacedonia waste
PPP

-

31

13

EIB loanMa’an solar PV

Jordan

170

129

129

JBIC and Nexi cover

BMR Jamaica
36MW wind

Jamaica-

63

63

OPIC and IFC loans

Pertama mine

Malaysia

384

267

82

KDB loan

Broadband ande-ticket PPP
contracts

Greece74

42

42

Kexim provided majority of the debt

Shuakhevi hydroGeorgia

417

250

250

ADB, EBRD and IFC loans

Renew wind

India

-

60

30

FMO loan

60MW Agua Fria

Honduras

125

90

45

Export Credit Norway split the debt

48

Details

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

IDFI
Project

Country

Cost

Debt

Involvement

Details

SunEdison solar
projects

Honduras

-

146

146

IFC, OPEC and Central American
Bank for Economic Integration

Green Infra

India

-

60

60

IFC loan

Etlik hospital PPP

Turkey

-

1,236

457

EBRD, IFC, Black Sea Trade
Development Bank, SACE, DEG

Donggi Senoro
equity loan

Indonesia

-

314

314

JBIC

Oyu Tolgoi
second stage

Mongolia

-

4,400

2,800

IFC, EBRD, US Exim, EFIC of Australia
loans and MIGA cover

Burnoye solar
50MW

Kazakhstan

-

92

92

EBRD and the Clean Technology Fund
provided loans

Voskhod
Chromium

Kazakhstan

-

260

130

EBRD loan

Tres Mesas wind

Mexico

-

241

241

OPIC and IADB

Source: Project Finance International, January 27, 2016
Examples of Project Bonds completed in Australia in 2015
IssuerConnecteast
Finance Pty Ltd

Project
Description

Refinance toincrease leverage

SectorPerth Airport

Transpower

Australia PacificAirports Pty Ltd

Refinance to fundcapex

Refinance to fundcapex

Refinance to fundcapexToll Road

AirportUtilities

AirportCountry

Australia

Australia

Australia

Australia

Project Type

Refinance

Refinance

Refinance

Refinance

Issue Type

AMTN

USPP

N/A

AMTN

Issue Ratings

Baa2

Baa2

A1

A3

Amount

A$300 million

USD$270 million

NZD$150 million

A$250 million

Maturity

7 years

10, 12, and 15years

7 years

7 years

Coupon4.25%

4.47-4.77%

4.30%

4.00%

SpreadN/A – Fixed

N/A

93.775

N/A

Reoffer Price

99.73

N/A

1

N/A

Listing

Unlisted

N/A

IDC CEP

N/A

Source: Moody’s Investors Service

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

49	Appendix B: Indicative Project Bond Financing (only)
Timetable and List of Responsibilities*

Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk
1
2
3
4
5
6
7
8
9
10 11 12
Issuer or municipality receives
authorisation from their board to issue
Appoint lead managers –organisational meeting all advisors

GeneralPreliminary due diligence; list of
background information prepared
Investor Pre-Sounding
Structure definition: guarantees,
covenant package, documentation
model, rating, listing, public vs.
private offering
Begin drafting Legal Documentation
Drafting of Prospectus and Legal
Documentation
Prepare Investor presentation
Receive Draft comfort Letters andLegal DocsDue Diligence with Bookrunners

PublicBond

Prepare Execution Versions
Announce Transaction
Sales tech-in / distribute marketing
materials
Roadshow (up to 5 days)
Bring down due diligence callPrice Notes
Execution of Legal Documentation
Close and fund transaction
Preparation of backgroundinformation, operating & Financial
data for the presentation / ongoingDD
Schedule rating meetings; Send
background information

RatingRating book sent to rating agencies
Rehearsal with management
Meetings with the rating agencies
Rating Agencies Analysis, initial
feedback (Provide as required)
Rating Agencies communicate rating* The timeline covers all the major steps in the execution of a bond offering, which takes approximately 12 weeks frommandate to closing in Europe. In Asia, this varies from jurisdiction to jurisdiction.

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

Appendix C: Typical bond and bank documentation

Typical bond documentation
Mandate/engagement letter
This deals with the appointment of the arranger/Lead Manager (if any).
Timetable and Responsibilities List
This will describe the main parties and their responsibilities, and will set out targeted deadlines from first meeting until closing.
Key Participants List
This will include key participants such as issuer, arranger/lead manager, legal advisors, auditors, credit rating agencies(if any), trustee or fiscal agent/paying agent, SPV management company (if required), listing agent (if any), printer (ifany), technical and environmental consultants, financial model auditor, insurance advisor.
Documents
Required documentation will depend on the transaction, but will typically include:• Preliminary Term Sheet• Offering document, comprising a prospectus or offering memorandum, as to the contents of which, see section 12• Underwriting/Subscription Agreement or Placement Agreement• Trust Deed/Deed of Covenant under which the bonds are constituted and which may contain the covenant
package – if there is more than one source of finance, a common terms agreement may be used
• Fiscal Agency Agreement20/Paying Agency Agreement• Interest Rate or Currency Swap Agreement (if any)
• Security Documents
Conditions Precedent Documents
The conditions precedent documents will vary between transactions but will generally include at a minimum:• Legal opinions from issuer’s legal advisors• Legal opinions from arranger’s/lead managers’ legal advisors• Comfort letters from the issuer’s auditors (delivered on the date of the prospectus on the closing date)• Auditor’s report on financial model• Tax report on overall structure• Technical Due Diligence report• Market Due Diligence report• Reliance letters from technical consultant• Copies of board resolutions and other authorisations for the transaction• Copies of governmental or other consents, authorisations, approvals, orders, filings, registrations required for theissuer to issue the bonds• Certificates of compliance from the issuer with relevant consents, authorisations, approvals, orders, filings,
registrations required for the issuer to issue the bonds• Other required certifications concerning anti-bribery and anti-corruption laws, money laundering, OFAC sanctions• Rating agency confirmation• Completion of KYC requirements
20 If no Trust Deed is used

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Typical Loan Documentation Requirements
Mandate/Engagement letter
This deals with the appointment of the Mandated Lead Arrangers (MLAs) (if any) and sets out the conditions for thearrangement and underwriting (if any) and the Commitment, the agreed syndication strategy and termination rights.
Timetable and Responsibilities List
This will describe the main parties and their responsibilities, and will set out targeted deadlines from first meeting until
closing.
Key Participants List
This will include key participants such as borrower, mandated lead arrangers, legal advisors, credit rating agencies(if any), security trustee, facility agent, SPV management company (if SPV is required), Technical and Environmental
consultants, financial model auditor, insurance advisor.
Documents
Required documentation will depend on the transaction, but will typically include:• Preliminary Term Sheet• Information memorandum, as to the contents of which, see section 12• Due diligence reports (including Technical, Environmental, Tax and Insurance consultants’ reports and audited
financial model with projected cashflows)• Security Documents• Facility agreement under which the loan is documented• Intercreditor agreement (defines sharing of security and voting rights between creditors, including swap
counterparties and subordination of any sponsor debt and equity)• Accounts agreement (security over and management of cash accounts, including use of proceeds and excess
cash flow distributions)• Bank meeting presentation (in case of syndication)• Agreed hedging policy• Interest rate or currency swap agreement• Fee letters signed with MLAs and facility agent
Conditions Precedent Documents
The conditions precedent documents will vary between transactions but will generally include at a minimum:• Legal opinions from issuer’s legal advisors• Legal opinions from investor’s legal advisors• Auditor’s report on financial model• Tax report on overall structure• Reliance letters from technical consultant• Copies of board resolutions and other authorisations authorising the transaction• Copies of governmental or other consents, authorisations, licenses, approvals, orders, filings, registrations
required for the issuer to enter into the loan
• Other required certifications concerning anti-bribery and anti-corruption laws, money laundering, OFAC sanctions• Completion of KYC requirements
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	Appendix D: Sample Credit Review Checklist from Banks,
Investors and Ratings Agencies

Asset type: Assets are often specialised and should have an economic life well beyond the term of the debt.
Term: The term of financing facilities should be commensurate with the economic life of the asset, and the project
structure should encourage subsequent refinancing either in the bank or capital markets. Shorter term development
and “bridge” debt financing will necessarily require near-term refinancing options. Equity investors will consider theinvestment horizon of funding sources and look to identify exit strategies commensurate with this tenor at the pointof investment. Institutional investors may be willing to hold assets for the life of the concession whereas closed end
investment funds will typically have a fixed term of 10-12 years.
Performance risk: An investor is exposed to the performance risks involved in the design, construction andoperation the project. Investors should understand and diligence all relevant commercial risks that are theresponsibility of the concessionaire, including volume risk, pricing risk and operating risk, suitable contractual
protections, qualified and competent counterparties and independent technical advice should be sought to ensure
adequate comfort.
Issuer financial covenants: Financial covenants, in which the issuer undertakes to comply with certain ratios, act
as a proxy measure of the issuer’s ability to service and repay its debt and, if measured in a consistent way, can be
an effective “early warning system” which allows investors to assess deteriorations in the risk attached to the credit
quality of the issuer and to the debt. Well-designed and appropriate financial covenants can also provide timely
performance indicators for investors.
It is however difficult to design a finite list of appropriate financial covenants as the terms may vary considerably
depending on the circumstances, including the nature of the issuer’s business, its credit quality and the scopeof financial covenants in existing bank loan and other debt documentation (although the starting point for financial
covenants will usually be the scope of any financial covenants in the issuer’s existing bank loan and other debt
documentation, if any). Key ratios in project finance include the Debt Service Coverage Ratio (DSCR), Loan Life
Coverage Ratio (LLCR), Project Life Coverage Ratio (PLCR) and Debt to Equity ratio. Precise definitions of the financial
covenants and each component of the ratios should be the subject of careful drafting in the documentation, andconsideration should be given to ensure consistency with those used in other bank loan and debt documentation(if any) and/or the accounting policies of the issuer. Issuers will be required to supply investors with a compliancecertificate signed by senior management of the issuer, at a frequency and time to be specified in the documentation,
demonstrating to investors their compliance with the covenants and potentially showing the calculations of any ratios
in the financial covenants, and based upon which investors will ascertain compliance with the covenants and, if
necessary, take appropriate actions.
Third Parties Credit Risk: Where third parties have significant obligations to the project company, their credit
standing is an important part of the credit application for the project. Third parties may include corporate entities,banks and insurance companies.
Environmental Risk: Environmental issues may materialise due to the intrinsic nature of project finance transactions
and sector environmental risk profiles. Most investors have adopted the ‘Equator Principles’21 which seek to provide aframework for assessing and managing social and environmental risks, in line with international best practice.
Documentation: Rights and obligations of the various parties must be clearly set out to avoid the risk of lengthy
litigation at a later stage. In respect of PFI/PPP projects the powers of the public sector body to enter into contracts
with the project company needs to be investigated. Other issues include the transaction structure, security, step-inrights, events of default and compensation on termination.
Interest Rates and Currency Risk: Changes in interest and currency exchange rates may materially affect the
project company cashflow. A hedging strategy should be established and described in the credit application.

21 http://www.equator-principles.com/

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53

Insurance: Insurance is required by the SPV to allow for, inter alia, reinstatement of assets, loss of earnings and third
party liabilities.
Tax: With the exception of corporation tax, the project company should not be exposed to changes in tax.
Regulatory Risk: Investors will consider the relevant country risk when assessing project returns. Long-term
infrastructure projects are exposed to potential changes in domestic regulations which may affect the economics ofa project, including changes to key concession terms, obligations and expropriation of the project itself. The risk istypically higher in countries with a less stable political structure and a shorter track record of private sector investment.
Unlike performance risk, regulatory risk cannot be captured accurately in the forecast project cashflows (or applied
scenario analysis); therefore this will necessarily be factored into the appropriate cost of capital for funding. Insurance
can be used to mitigate specific risks, for example MIGA, the World Bank subsidiary offers cover for contractual
performance and expropriation risk.

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	Appendix E: ADB’s credit enhancement for a local currency
project bond – Tiwi-MakBan Case Study

The project bonds were issued by AP Renewables, Inc. (APRI), an indirect wholly-owned subsidiary of Aboitiz Power
Corporation (APC), in relation to the Tiwi and Makiling–Banahaw (Tiwi-MakBan) geothermal power plant complexes
operating in two locations in the province of Albay and on the boundary of Laguna and Batangas provinces, thePhilippines.
TABLE 1 – TIWI-MAKBAN PROJECT DETAILS
Project Company

AP Renewables, Inc.

Shareholder/Parent

Aboitiz Renewables, Inc.

SponsorAboitiz Power Corporation

LenderAsian Development Bank

Mandated Lead Arranger andBookrunner

BPI Capital Corporation

Guarantor

Asian Development Bank

Guarantee participant

Credit Guarantee and Investment Facility

Bonds Facility, Intercreditor
and Security Agent

BPI, acting through its Asset Management and Trust Group

Project

Refinancing and financing of operation and maintenance

Capacity

Combined installed capacity of 676 MW

Sites

Tiwi complex in Albay province, the Philippines
Makiling-Banahaw complex on the boundary of Laguna and Batangas
provinces, the Philippines

Project Company Counsel

Gibson, Dunn & Crutcher (International Counsel)
SyCip, Salazar, Hernandez & Gatmaitan (Local Counsel)

Lender Group Counsel

Freshfields Bruckhaus Deringer (International Counsel)
Picazo Buyco Tan Fider & Santos (Local Counsel)

Debt

PHP12,500,000,000, consisting of:(i) PHP10,700,000,000 Project Bonds(ii) PHP1,800,000,000 Term Loan

Tenor

10 year Project Bonds
5 year Term Loan

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55

Financing Structure
Aboitiz Power
Corporationas sponsor

CGIF
as guarantee
participant
Risk participation

Aboitiz
Renewables, Inc.
as shareholder

Share pledge andproject level security

100% equity
AP Renewables, Inc.
as project
PHP
company
financingADB
as guarantor
Guarantee

10 year

Project
Bonds

BPI
as bondholder

Term LoanADB
as lender

AssetsTiwi
Complex

MakBanComplex5 years

The Tiwi-MakBan geothermal plants
Despite the potential of geothermal power in the Philippines’, few geothermal power transactions have occurred in the
country, mainly due to a lack of risk appetite on the part of developers and lenders.
The facilities were developed in the 1970s by the government’s National Power Corporation. Originally built witha nameplate capacity of 676 megawatts (MW) (234 MW at Tiwi and 442 MW at MakBan, the 7th and 4th largest
geothermal power plants in the world), the facilities had fallen into disrepair by the mid-2000s. Effective availability in2007 was 41% at Tiwi and 63% at MakBan, well below industry standards. APRI acquired the plants from the Power
Sector Assets and Liabilities Management Corporation, a government-owned company, in 2009. By mid-2013, after
4 years of turnaround activities, the sponsor had increased plant availability to above 90%, improved generation
efficiency, and extended the plants’ operating life. As of 2015, Tiwi–MakBan accounts for 17% of the Luzon grid’s
dependable capacity of renewable energy. The plants are operated by APRI, while geothermal water and steam
production are supplied by Philippine Geothermal Production Corporation, which is responsible for the operation andmaintenance of the wells and steam fields themselves. Offtake is through a mix of bilateral contracts and spot sales
on the Philippines’ Wholesale Electricity Spot Market (WESM). Currently, the project is operating with an average load
capacity of 345 MW, with potential operation capacity of 676 MW. This disparity is due to restrictions on steam supply
associated mainly with the steam fields’ natural decline.

The financing structure
The PHP12,500,000,000 financing consisted of two tranches, PHP10,700,000,000 partially guaranteed climate nonrated project bonds and a PHP1,800,000,000 term loan. This financing is noteworthy as it represents a Landmark
use of project bonds in the region (excluding Malaysia) since the Asian Financial Crisis, being the first local currency
project bond in the Philippines power sector, the first credit-enhanced project bond in the Philippines, the first Climate
Bond certified in emerging markets for a single project, and the first green bond in the Philippines.
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The bonds – The bonds were issued by APRI in the amount of PHP10,700,000,000 without any credit support fromits parent Aboitiz Renewables, Inc. or ultimate shareholder APC. The bonds are amortised over 10 years. The initialpurchaser of the bonds was BPI. BPI may sell down a portion of the bonds to a limited number of primary institutional
lenders, such as insurance companies and pension funds, in line with existing regulations in the Philippines. BPI,
acting through its Asset Management and Trust Group, acts as agent for the transaction. BPI Capital Corporation,
a wholly owned subsidiary of BPI, was the mandated lead arranger and bookrunner. ADB provides a Partial Credit
Guarantee (PCG) to the bondholders in respect of 75% of the principal and interest thereon.
CGIF, a trust fund of ADB established in 2010 with the aim of promoting economic development, stability and resilience of capital
markets in the ASEAN + 3 (China, Japan, and Korea), entered into a risk sharing agreement with ADB in respect of the PCG.
To the extent ADB pays out under the guarantee, it is funded or indemnified by APRI for the same amount which it
would then pass to CGIF its entitlement thereof.
The term loan – ADB also lends PHP1,800,000,000 by way of a 5-year direct term loan to APRI.

Highlighted features of the project bonds
The financing was highly negotiated, marrying the need for international standards for the project bond that would
accelerate the development of the private sector bond market in the Philippines with APRI’s expectations as anexperienced owner and operator of a high quality brownfield asset.
Key features included:• Revenues generated from the wholesale electricity spot market – The Philippines’ spot market for power, theWESM, was established in 2006 to encourage competition and reduce energy prices. The market follows agross-offer-pool, net-settlement model, and enables the trading of electricity as a commodity in 24-hourly trading
periods. All available power in the system — including contracted capacity sold under bilateral arrangements — isdelivered through WESM and prices for spot transactions are set through competitive bidding.
• Steam supply risk – Steam supply is naturally one of the key risks associated with geothermal power projects,
requiring a thorough analysis of the contractual supply arrangements and the performance of the wells and steam
fields. For this project, while the steam fields are in a natural decline, they had long operating histories. In addition,
the steam fields are in two locations, diversifying the supply risk to the project, and the significant spare installedcapacity limits the likely impact of any failure in the generation facilities.
• CBI Climate Bonds Certification – In full support of ADB’s objectives in developing the market for project bonds in renewables,
as part of the financing, APRI successfully applied for Climate Bonds Certification from the Climate Bonds Initiative, allowing
the investors to assess the bonds’ environmental integrity on a common set of standards based on third party certification.
• Security package – The security package was devised based on a clear understanding amongst the lending
group of (i) the complexities introduced by the project having been developed by the Philippine government and(ii) the security and enforcement options available for an entirely Philippines-based project and sponsor.
• CGIF as guarantee participant – CGIF plays an integral role in the credit enhancement for the bond issuancethrough its back-to-back arrangement with ADB, yet is not itself a secured party for the purpose of the financing
documents. A solution was reached with APRI and the lender group whereby CGIF was entitled to certain rights
as if it is was a secured party, including direct voting rights on certain intercreditor matters for which CGIF would
not need to rely solely on the terms of its risk sharing arrangement with ADB.

Conclusion
The project bond model represents an exciting opportunity for ‘developing Asia’ issuers to access domestic debt capital
markets for projects that would not otherwise qualify for financing and for a broader range of investors to gain exposure to
emerging market infrastructure. The Tiwi-MakBan deal shows that the model can work in the context of an ‘Emerging Asia’.

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57

	Appendix F: CGIF’S CONSTRUCTION PERIODGUARANTEE

Construction risk has long been an impediment for the use of project bonds to finance green-field infrastructure projects.
Despite being suitable long term investments for pension and life insurance funds in the region, exposures to green-field
infrastructure projects fall outside the risk appetite of their conservative investment strategies due to construction risks.

Construction Period Guarantee
CGIF’s Construction Period Guarantee (“CPG”) is aimed at allaying bond investors’ concerns about construction risks
by guaranteeing the completion of construction works and the commencement of the operations phase in a project
which will be financed by project bonds issued in the local currency bond market in the region. Under this facility, CGIF
irrevocably and unconditionally guarantees the non-payment of scheduled payments for the project’s bonds occurring
prior to the commencement of commercial operations. If a project’s completion is delayed, CGIF shall ensure that the
project bonds are adequately serviced on a timely basis. In the unlikely event that it cannot be completed, CGIF shallaccelerate the guaranteed bonds and pay 100% principal and accrued interest amounts owing to bondholders. CGIF’s
CPG will terminate upon the commencement of commercial operations as defined in the project documents.
To take on construction risks, CGIF has developed a comprehensive assessment framework that allows these risks
to be measured and managed. Components of this framework allow for expert judgement of the various risk factors
relating to the construction works as critical inputs in the assessment. Risks are also managed by CPG’s boilerplate
requirements on the various contractual agreements and risk mitigants that are consistent with international project
finance practices to frame up the boundaries of risk during the construction period to manageable levels.

Anticipated Impact
CPG is anticipated to boost the use of local currency project bonds for new projects in the region by eliminating
construction risks for bond investors investing in green-field projects. If rated, with CGIF’s CPG, the project bond’s
rating during the construction period should not be lower than its operations phase rating.

Intended Benefits
Project Companies: CGIF’s CPG is envisaged to enable infrastructure project developers to tap long term local currency
project bonds that otherwise would not normally be accessible. Project companies are also able to engage with asingle controlling creditor with respect to the monitoring of construction progress and consent requirements instead ofnumerous bondholders. The elimination of rating penalties (notching down or caps) associated with construction risks
helps improve the long term bond pricing and deliver considerable interest savings to the project over its life.
Investors: With the mitigation of one of the most significant concerns, conservative life insurers and pension funds
in the region can now invest in safe and highly rated project bonds that provide long term stable fixed income thatmatches well with their long term liabilities. Supporting projects at the green-field stage will allow these funds to directly
contribute to building infrastructure. Investors will also be relieved of the necessary monitoring and management
obligations of lenders during the construction phase.
Governments: By ensuring that the projects meet CPG’s boilerplate standards with respect to the various concession
and construction contracts, Governments will be ensuring that the respective projects are well delivered. This helps
boost private sector participation and long term regional savings to help boost the roll-out of infrastructure projects.

Eligibility
CGIF’s CPG will be deployed to projects in the ASEAN+3 region for qualifying green-field projects. Guaranteed debt
instrument should be local currency bond or notes issued via public or private placement by a ring-fenced SPV tofinance a specific infrastructure project.

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

CGIF will only guarantee projects that meet CPG’s boilerplate requirements, which include a robust construction work
programme in the hands of experienced and capable contractors. The project shall also meet CGIF’s Know Your
Client, Environmental & Social Safeguard Policy and due diligence requirements. These will include 3rd party expert
consultant and legal counsel opinions on the respective technical aspects to the construction works, contractual
arrangements as well as the environmental and social impacts.

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59

Appendix G: Glossary of Terms

AIIB

Asian Infrastructure Investment BankADB

Asian Development BankASIFMA

Asian Securities Industry & Financial Markets Association

Availability-based
projects

Projects that entitle a private entity to receive regular payments from a public sector entity
to the extent that the project asset is available for use in accordance with contractuallyagreed service levels

Basel IIIA comprehensive set of reform measures, developed by the Basel Committee on Banking
Supervision, to strengthen the regulation, supervision and risk management of the banking
sectorBrownfieldA private entity takes over the management of a state-owned enterprise or, alternatively, a
project in which construction and testing have been completed which is now operationaland revenue generating

Build-OperateTransfer Projects(BOT)

A Build-Operate-Transfer (BOT) Project is typically used to develop a discrete asset
rather than a whole network and is generally entirely new or greenfield in nature (althoughrefurbishment may be involved). In a BOT Project, the project company or operator
generally obtains its revenues through a fee charged to the utility/ government rather thantariffs charged to consumers. A number of projects are called concessions, such as tollroad projects, which are new build and have a number of similarities to BOT projects

Build-OwnOperate-Transfer(BOOT)A Build-Own-Operate-Transfer is a varation of a BOT in which a developer (1) designs andbuilds a complete project or facility (such as an airport, power plant, seaport) at little or no
cost to the government or a joint venture partner, (2) owns and operates the facility as abusiness for a specified period (usually 10 to 30 years) after which (3) transfers it to thegovernment or partner at a previously agreed-upon or market-price.

Committed

A financing facility provided by a bank to a borrower, which cannot be withdrawn unless theborrower breaches covenants or other terms of the facility

Concession

A type of PPP. A concession gives an operator the long term right to use all utility assets
conferred on the operator, including responsibility for all operation and investment. Assetownership remains with the authority. Assets revert to the authority at the end of theconcession period, including assets purchased by the operator. In a concession theoperator typically obtains its revenues directly from the consumer. A concession covers anentire infrastructure system.

Covenant

A condition that requires a borrower to fulfil certain conditions or which forbids a borrower
from undertaking certain actions, or which in other ways restricts certain activities. A key
financial covenant in a project financing is the debt service coverage ratio (DSCR) which
can give an indication of a deterioration in the risk of the debt due to a fall in the ratio(caused for example, by a decline in expected revenue from the project)

Debt Service

Scheduled payments of principal and interest

Debt Service
Coverage Ratio

Within a given ratio, the ratio of cash available for debt service divided by debt service
payments scheduled in that period

Demand risk

Reliance on income from a third party for a project, for which credit enhancement isusually required, or the risk during the operational phase from not having a contractually
guaranteed revenue stream and thus being subject to volume or price risk

EPC companies

Engineering, Procurement and Construction companies (development companies)

EPC contractor

Engineering, Procurement and Construction contractor

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ASIFMA–ICMA Guide to Infrastructure Financing in Asia

Financial model

A financial model is built to confirm that a project is economically viable for the lenders but
also for the equity investors and any offtaker/ contracting authority or users in the expected
future scenario and, through the use of sensitivity calculations (stress testing), to confirm
that lenders are not at undue risk in a downside scenario. The inputs required for sucha model include the underlying macroeconomic assumptions, the cost of the projectand its financing structure, the expected operating revenues and costs and any relevant
accounting or taxation assumptions

GDP

Gross domestic productGreenfield

The project is not yet built. Financing is required for both the construction phase andpermanent operations, or, a project still at the planning stage which requires financing forthe construction and operational phases

ICMAInternational Capital Market Association

IFC

International Finance Corporation

Intercreditor
Agreement

An agreement which regulates the respective rights and ranking of two or more funders ina single class of security or between different classes of security in a financing, including
rights to receive payments and rights to enforce security

IRSG

International Regulatory Strategy Group

Issuer

The issuer of the debt for the infrastructure project (usually an SPV). This may be theproject company or a separate (usually sister) company incorporated to issue the bonds
and on-lend the proceeds to the project company

KYC

Know your customer – the process used by a business to verify the identity of its clients

LIBOR

London Interbank Offered Rate

Mark-to-market

The accounting act of recording the price or value of a security, portfolio or account toreflect its current market value rather than its book value

OFAC Sanctions

US sanctions administered by the Office of Foreign Asset Control of the US Department of
the Treasury

Project company

Normally the sponsors will create an SPV known as the project company, which is thecounterparty to the contracts with the construction company, offtaker, concession provider
etc. The project company could also be the borrower of debt or the issuer of bonds.
However, in some cases, for regulatory and tax reasons, a separate (usually sister) company
is incorporated to issue the bonds and on-lend the proceeds to the project company

Public Private
Partnership (PPP)

PPPs describe a form of cooperation between the public authorities and economic
operators. The primary aims of this cooperation are to fund, construct, renovate or operate
an infrastructure or the provision of a service

SPV

Special Purpose Vehicle

SponsorA party which develops and becomes a shareholder in infrastructure projects

Swap

A derivative in which two counterparties exchange cash flows of one party’s financial
instrument for those of the other party’s financial instrument

Swap curve

The name given to the equivalent of a (sovereign) yield curve but using market swaps prices.
The swap curve shows the relationship between swap rates at varying maturities and can beused as the basis for pricing fixed income bonds as in ‘mid-swaps plus spread of x bp’

Volume risk

Volume risk arises from a project not generating the expected revenue as a result of lower
volume of output (such as electricity) or from the lower than expected usage of a project(such as a toll-road) or from selling prices/ charges, being below expectation

Yellowfield

Category of infrastructure which sits between traditional greenfield and brownfield asset
categories. Yellowfield assets are assets which require work to either upgrade or replace
the asset. Construction work is involved but is considered a lower risk than greenfield as
more performance information will be available

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Appendix H: Further resources

ASIFMA Infrastructure Project Bond Factsheet: Attracting Foreign Investors
The ASIFMA Infrastructure Project Bond Factsheet is a comprehensive document which contains recommendations,guidance notes, key steps, etc for Foreign Investors and Asian players that would want to know more and invest into
Asian Infrastructure Project Bonds.
www.asifma.org/uploadedFiles/ASIFMA Infrastructure Project Bonds Factsheet Final version.pdf

ADB
http://www.adb.org/

AIIB
http://www.aiib.org/

ASIFMA
http://www.asifma.org/

ICMA
http://www.icmagroup.org/

IFC
http://www.ifc.org/

World Bank
http://www.worldbank.org/

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Contacts

Mark Austen
Chief Executive Officer
Asian Securities Industry & Financial Markets Association (ASIFMA)
mausten@asifma.org+852 2531 6510
Timothée Bihet
Associate, Fixed income
Asian Securities Industry & Financial Markets Association (ASIFMA)
tbihet@asifma.org+852 2531 6522
Katie Kelly
Director, Market Practice and Regulatory Policy
International Capital Market Association (ICMA)
Katie.Kelly@icmagroup.org+44 (0)20 7213 0331
Mushtaq Kapasi
Chief Representative, Asia-PacificInternational Capital Market Association (ICMA)
Mushtaq.Kapasi@icmagroup.org+852 2531 6590

ASIFMA–ICMA Guide to Infrastructure Financing in Asia

63

Asia Securities Industry & Financial Markets Association
Unit 3603, Tower 2
Lippo Centre
Admiralty
Hong Kong
Tel: +852 2531 6500
Email: info@asifma.org
www.asifma.org
International Capital Market Association
Dreikönigstrasse 8
CH-8002 Zurich
Switzerland
Tel: +41 44 363 4222
Email: membership@icmagroup.org
www.icmagroup.org