Asian infrastructure companies may sell dollar bonds to finance projects as bank regulations and tightening liquidity complicate loans that dominated funding for the past 15 years, according to HSBC Holdings Plc.
“We will see a shift into project bonds because the investor base that used to exist, the project-finance lending banks, are going to find life a lot more difficult,” said Stephen Williams, the head of global capital markets for the Asia-Pacific region at HSBC. Financial institutions increasingly find it difficult to lend at long maturities, due to the so-called Basel III rules on capitalization, Williams said in an interview at his offices in Hong Kong.
The Philippines may tender $3.2 billion for infrastructure this year, the government said last week. Indonesia will invest 1,786 trillion rupiah ($194 billion) in roads, ports and power plants under its 2011-2025 development plan. Companies borrowed $138 billion from banks to finance projects in Asia since 2001, compared with $910 million raised through three dollar bonds since 1997, according to data compiled by Bloomberg and figures from HSBC. In the U.K., 57 bond sales brought in more than 14 billion pounds ($21.7 billion) to fund projects since 1996.
Such notes use cash flows generated by specific projects to pay bondholders’ interest and principal. Asian companies issued five dollar securities to support projects between 1995 and 1997, HSBC data show, before sales stalled in 1997 during the Asian financial crisis.
“The project-bond market could be quite exciting going forward and we’ll hopefully see at least one deal this year,” Williams said.
Some companies are scaling back loan operations. IFC Development Ltd. reduced a planned HK$17 billion ($2.19 billion) loan to HK$5 billion due to tightening market liquidity, a person familiar with the matter said in October. Societe Generale SA is also reviewing its shipping and aircraft financing units, four people with knowledge of the matter said that same month.
The regulations, which are being phased in by the Basel Committee on Banking Supervision ahead of a January 2019 deadline, require lenders to hold more assets as a buffer against potential loan defaults.
HSBC relocated Andrew Yau from London last year to meet anticipated demand for project bonds in Asia. Yau joined Benjamin Gilmartin in Hong Kong as part of the bank’s structured finance team, which includes eight others focused on infrastructure in London.
The Asian Development Bank expects the economies of China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand, to grow 7.2 percent in 2012, according to a December report.
China cut reserve requirements last month to encourage growth even as Zhang Jianhua, head of the research bureau at the People’s Bank of China, estimated today that inflation would remain around four percent this year. The Manila-based lender forecasts the euro region’s gross domestic product will expand 0.5 percent.
“Asian governments will look at the global macro environment and probably try to play closer to home by making their companies more competitive and enriching their domestic populations so they consume more,” said Williams. “One of the ways they can do this is with infrastructure spending.”