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Asia Connect / Treasury & Capital Markets
Opportunities in Belt Road uneven as construction risks weigh
Belt and Road comes with opportunities - and a host of challenges
The Asset 1 Dec 2017
SINGAPORE – Investors and lenders are seeing long-term strategic cash flows and financing opportunities across the region in relation to China’s Belt and Road initiative, although challenges including construction risks may weigh funding efforts.
 
“The Belt and Road initiative is the beginning into a long bond market involvement into infrastructure,” says Surya Bagchi, ‎global head, project and export finance, corporate finance at Standard Chartered during the Belt and Road panel at The Asset 12th Asian Bond Markets Summit in Singapore.
 
“We can have solutions where you bundle project finance loans, taking the form of securitization or CLOs (collateralized loan obligations),” he adds, noting that there are other forms of financing solutions that can develop with the Belt and Road.
 
But the challenges also are real. He cited the need for a proper assessment of risks in destination countries. Banks will need to realize the range of risks present in Belt and Road projects, he adds. Security, legal and regulatory, government effectiveness, political instability are among these risks.
 
With such large outlays, a rigorous assessment of credit worthiness in the countries in which these companies will be operating would be advisable, Bagchi tells the near 300 participants of the bond summit.  
 
“If you look at Bangladesh, Myanmar, Vietnam – with the countries that are perceived to have high fiscal risk, it’s important you have experienced banks and EPC contractors for these projects," says Timothy Histed, head of South and Southeast Asia, Multilateral Investment Guarantee Agency (MIGA).
 
“It’s an ecosystem we rely on to mitigate risks that arise from the project,” he adds. He says it is also a good sign that some of the Chinese banks are coming to MIGA for cover when it comes to funding Belt and Road projects.
 
Peter Alleston, director, head of private equity services APAC at IHS Markit is seeing increased innovation in terms of structuring vehicles and transferring sub investment grade to investment grade products. Investors are also lured by the rate of returns on these projects, which vary depending on the industry and the stage of the project. Returns on operating assets on an internal rate of return basis could hit about 5% to 10%, he notes.
 
Justin Sun, executive director at China Universal Asset Management Opportunities, expects to see a more diversified set of investment products in line with the Belt and Road initiative.
 
“With the Belt and Road, there will be a lot of things we can do,” he adds. He says Belt and Road project bonds are “very attractive”.
 
“Yield-wise – investors (in Belt and Road) are mainly institutions, but behind them are a lot of retail investors,” Sun notes, though he adds that investing in Belt and Road requires a lot of homework.
 
Elsewhere, Ming Leap, associate director, Asian fixed income at HSBC Global Asset Management says the emergence of China over the course of the decade has led to a paradigm shift - a new normal.
 
"The development of the bond market in China should lessen the pressure felt in the Asian dollar bond market. There has been strong supply and strong demand this year," he adds.

 

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