Asian finance ministers last week endorsed a plan to introduce a new credit enhancement tool to promote local currency bonds for infrastructure financing.
Meeting in Fiji on May 2, ministers from the ASEAN+3 grouping of South-East Asian nations, China, Japan and South Korea agreed on a new roadmap for the ASEAN Bond Market Initiative that prioritises infrastructure funding and green finance.
The IIP will function alongside the existing Credit Guarantee and Investment Facility, which has been tasked with developing the new product.
Kyoshi Nishimura, CGIF chief executive, said the IIP would support bond issuance and bank loans in local currencies to help infrastructure developers raise long term finance in their own currencies. By providing credit enhancement for greenfield project loans, the IIP aims to encourage more infrastructure developers to raise local currency loans that can be refinanced through bonds after the construction period is complete.
The new facility will also seek to mobilise capital in the developed markets.
“In addition to the capital contributed by the governments, IIP will issue mezzanine bonds in developed bond markets, in Japanese yen. We have done a feasibility study and this concept seems to work,” said Nishimura, speaking at an IFR seminar during the Asian Development Bank meetings in Fiji.
Ministers have yet to sign off on additional commitments for the IIP, but initial plans call for US$200m of first-loss equity from ASEAN+3 governments to be complemented by another US$400m of private capital from the proceeds of bond issuance in developed markets, most likely funded by Japanese institutional investors.
With an initial US$600m capital base during its pilot phase, the IIP would be able to guarantee up to about US$1.5bn in ASEAN local currencies to support infrastructure finance. The bond market roadmap also calls for efforts to promote green finance across the region’s local bond markets.
The ABMI plans to set up a support facility for Green bonds that will provide advisory services and training to potential issuers and provide grants to offset the cost for external reviews and certification for Green bonds.
Such a move would add to the many government-level schemes that aim to promote Green bond issuance in Asia. Singapore has set up a grant to cover issuance costs for Green bonds listed on SGX, as has Hong Kong.
Malaysia, which boasts the region’s biggest infrastructure bond market, provides subsidies for socially responsible sukuk issuance and has also set aside M$2bn (US$482m) to cover the first 2% of coupon payments for eligible issuers under a green technology financing scheme.
ASEAN governments have intensified their efforts to promote green infrastructure, most recently through the launch of the ASEAN Catalytic Green Finance Facility with the ADB and a group of European development finance institutions. The green facility aims to spur more than US$1bn in green infrastructure investments across South-East Asia through loans and technical assistance.
Separately, the ASEAN Infrastructure Fund and the Republic of Korea are working on a pilot deal in South-East Asia under a new oceans financing initiative to support bond issuance and private sector investment for sustainable marine projects.
Ministers also agreed to promote standardised documentation requirements and settlement processes across the region’s bond markets, notably through the issuance of bonds under the ASEAN+3 Multi-currency Bond Issuance Framework (AMBIF) – a one-size-fits-all template that has been used in Cambodia, Thailand and the Philippines.
The group of ministers also welcomed progress on an agreed capital increase for the CGIF, which offers guarantees to promote cross-border issuance in Asia’s local currency bond markets. ASEAN+3 governments have agreed to raise CGIF’s paid-in capital from US$700m to US$1.2bn, and payments are under way: China’s contribution of US$142.8m on April 23 lifted CGIF’s capital to US$1.002bn.
Source Nasdaq