Only one in five Asian G3 bond investors say they had invested or planned to invest in project bonds for greenfield projects, a survey by Asset Benchmark Research (ABR) finds. That compares to nearly half the number of investors in the same survey that plan to invest in green bonds.

When asked what it is that investors look for when investing, a government guarantee was of highest priority (59%), followed by a financial institution guarantee (49%), multilateral guarantee (36%) and recourse to sponsors (31%). 

Speaking at a recent bond summit held by The Asset, executive director, project and export finance at Standard Chartered, Abhishek Badkul, suggests market participants in project finance have declined since the global financial crisis.

"Of course, with commodity-linked sectors going down there's a lot of effect of that, oil and gas as well as metals and mining. In the infrastructure space, I think it takes time to develop these projects and there is a lag effect. Project finance opportunities continue to be there in a limited way across the market."

Vijay Pattabhiraman, CIO of Asia Infrastructure Investments at J.P. Morgan Asset Management agrees with the sentiment. "Project finance forms a very small percentage of the total financing that infrastructure sees in this region," he says. The key reason being that while bankers can model risk, it's much more difficult to model uncertainty.

In 2015, bond financing as a proportion of total project finance debt issuance globally fell to 11% from 16% in 2014 and 19% in 2013, according to an industry report led by the Asia Securities Industry & Financial Markets Association (ASIFMA). The proportion of project bond financing in Asia-Pacific's debt issuance remained unchanged in 2015 at 6.5% from a year ago.

Pattabhiraman suggests there are different risks in project finance that need to be considered including regulatory and counterparty risk. "Enforceability under different legal jurisdictions in the region is also often problematic."

The main type of project financing in the region is in the form of bank loans. According to Badkul, this market is more adept at assessing greenfield risks and are able to finance in some cases even without having completion guarantees from shareholders. He also explains how as compared to banks that can finance in stages, bonds are typically issued in full which brings with it a negative carry impact over time.

There is still hope for project bonds, however, considering Basel III regulations are causing banks to shrink their balance sheets and reduce project finance lending. Additionally, real money investors including insurance companies and pension funds tend to prefer long-dated investments such as project bonds whose tenor and fixed rate match their long-term liabilities.

The survey was part of the annual Asian G3 Bond Benchmark Review. The survey provides a wealth of data on the product needs of institutional investors and the market penetration of banks active in the Asian G3 bond market and Asian CDS space.

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