Bankable Insights – Credit Markets Edition III_December 2021
Bankable Insights – Credit Markets: A collection of the latest insights and perspectives on topics of relevance to the Credit Markets industry
*Bankable Insights* Credit Markets
Edition III
Channelling capital to where it’s needed most
December 2021
It is tempting to think of 2021 as a fast and furious year that kept financial markets on their toes: the pandemic-driven economic swings, uneven vaccine rollouts, the recent emergence of Omicron, surging energy prices – all paint quite a dramatic picture of 2021. And I am not denying that it has not been quite the ride. But as I look at what we have achieved in credit markets in partnership with our clients this year, I am very proud of how far we have come and how we have been able to make a difference.
The articles and case studies we have collated in this year-end edition of Bankable Insights are testament to this tremendous, collaborative effort. Whether we take a closer look at how the oil and gas industry is navigating its move to net zero, the projects underway to fill infrastructure funding gaps in Africa, or new investment opportunities in Asia’s changing credit landscape: to me, they are all positive examples of how we have turned challenges into opportunities, especially in developing markets where funds are most needed.
I look forward to 2022 and continuing on this trajectory, always challenging ourselves to be more innovative, more collaborative, and never complacent. We can expect to see tensions between growth and climate change intensify next year and both public and private sectors will need to make significant capital investments to meet climate transition goals. Credit markets will continue to play an important role in channeling capital for critical and sustainable development and I am excited to be part of this effort.
A big thank you to all our clients for trusting in us as a partner on this journey and for inspiring us to always do better. To a great 2022 and to continuing to invest in the great transformation, where our mantra continues to be to ’turn capital into a force for good’.
Best wishes to you and yours for the festive season and new year!
Henrik Raber
Global Head, Credit Markets
Standard Chartered
Turning challenges into opportunities: how well are oil and gas companies navigating the move to net zero?
Turning challenges into opportunities: how well are oil and gas companies navigating the move to net zero?
To successfully navigate the energy transition, the oil and gas industry must continue a proactive dialogue with investors, banks and regulators.
The oil and gas industry is weathering a turbulent period. Rattled by the COVID-19 pandemic, a slump in oil prices and a push to net zero, the world’s largest oil and gas companies are facing an existential crisis.
As pressure from climate and investor activism heightens and investment patterns transform with a keen eye on sustainable and resilient assets, the sector is reassessing its business model and striving for a new balance between net zero and net profits. Today’s investors expect to see companies with clear strategies for expanding their renewable energy capacity and well thought-through roadmaps outlining achievable emissions-reduction targets.
To successfully navigate these changes, turn them into opportunities and future-proof itself, the oil and gas industry must continue an open and proactive dialogue with investors, banks and regulators.
The energy transition brings challenges to the oil and gas sector, but huge business opportunities as well. We're all on the journey to net zero, so working together to develop clear transition strategies and articulate those to investors, will be key to keeping capital flowing.
Clare Francis
Regional Head of Client Coverage in Europe,
Standard Chartered
According to the International Energy Agency (IEA), no energy company will be unaffected by the transition1 to net zero. A report from CMS Legal Services points out that there’s already evidence in Asia that access to financing for coal and oil companies has fallen2. This trend is likely to continue.
The impetus for change comes after the COVID-19 crisis3 pushed oil prices to 30-year lows, underscoring the need for an industry-wide shift and diversification. Less business travel and more working from home will continue to diminish the demand for oil, forcing companies to revisit their business models. The issue is no longer when oil will run out, but rather when the transition to other forms of more sustainable energy will take over4. Against this backdrop, shoring up balance sheets and cash positions has taken on increasing importance, with all companies facing questions about how and when they can deliver climate solutions.
And it’s not just about the high-profile names you see making headlines. While seven large integrated oil and gas companies dominate much of the dialogue, the IEA says, the wider industry also needs to respond. The seven majors account for just 12 per cent of oil and gas reserves, 15 per cent of production and 10 per cent of estimated emissions from operations, underscoring the share made up by other players.
For oil majors caught between climate goals and shareholder returns, forging a path to transition has become a question of survival. A failure to demonstrate a clear strategy to embrace other forms of energy generation risks capital drying up and investors seeking opportunities elsewhere. Oil and gas companies − from the smallest to the largest − are now vying against one another for capital and need to demonstrate how and why they deserve it.
The solution is a mix of innovation − thinking more broadly about attracting investors; creativity − including looking at alternative markets and different sources of capital; and strategy − educating potential investors and presenting a roadmap with targets to get to net zero.
Financing these shifts requires skill, as investors focus on the global transition to more sustainable sources and companies must work harder to prove they are meeting environmental, social and governance (ESG) criteria. Strong relationships and collaboration between investors, banks and company management is critical.
Standard Chartered is working on the financing side to support and manage the transition of companies from oil and gas to lower carbon companies, which presents an ongoing challenge to corporate treasurers in the sector.
Thriving in this tricky environment requires adequate liquidity management structures. For example, oil major BP raised USD12 billion of hybrid bonds5 last year to help shore up its balance sheet. The instruments, which have equity-like features, place less strain on the balance sheet, and were issued in a year where BP also agreed a two-year credit facility6 to help its liquidity management.
It is important for corporate treasurers in this sector to keep options open and evaluate them on a continuous basis − harnessing the power of market fundraising. Exploring different structures, like convertible bonds and hybrid bonds, is also central to success, as well as understanding how best to incorporate the focus on ESG into assets and what this means for investor education.
Turning challenges into opportunities
A three-pronged approach should be considered, according to consultancy firm McKinsey & Co. Firstly, making the core hydrocarbon businesses more resilient; secondly, finding ways to expand the low-carbon businesses; and thirdly, changing the operating model to survive in a low-carbon future.
Traditional business models in this sector have been under pressure for some time, McKinsey says, as evidenced by a lag in total returns. The average oil and gas company lagged the S&P 500 by seven percentage points in the past 15 years, in terms of annual total returns to shareholders, its research shows.
Even so, the sector is vital, since oil and gas are set to remain an important part of the energy mix, particularly for developing countries. And while decarbonisation is top of the global agenda, a smooth transition means oil and gas companies will continue to play a central role for decades to come.
But the pace of change needs to accelerate, according to the IEA, which calculates that, so far, investment by oil and gas companies outside their core business areas has been less than 1 per cent of total capital expenditure. Among the major oil and gas companies, the figures are slightly better, with investment in the energy transition jumping to 3.6 per cent of capex in 2020, from 2.9 per cent in 2019, according to CMS Legal Services.
Maintaining reliable funding flows to allow this sector to transition towards a lower-carbon future is going to require us to scale our strategy and of course, our relationships. After the significant price volatility we’ve seen, net zero will continue to shape the future of the oil and gas industry for many years to come. We are committed to partnering with the sector and support this transition.
Clare Francis
Regional Head of Client Coverage in Europe,
Standard Chartered
Filling the infrastructure funding gap in Africa:
where collaboration meets innovation
Filling the infrastructure funding gap in Africa: where collaboration meets innovation
Here’s how collaboration and innovation are becoming key to providing long term infrastructure funding in many high-risk emerging markets like Africa.
Inadequate infrastructure remains a major obstacle towards Africa achieving its full economic growth potential. Most of the African continent lags the rest of the world in coverage of key infrastructure classes, including transportation, healthcare, energy and water.
The African Development Bank estimates that the continent’s infrastructure financing1 needs will be as much as USD170 billion a year by 2025, with an estimated hole of around USD108 billion a year. The scale of the funding deficit is so large and of such strategic importance that it remains crucial to encourage international investment to fill it. Closing the gap matters because it will aid economic development, help raise living standards and boost the prosperity of businesses across the continent.
It is therefore encouraging to see new patterns of infrastructure funding emerging that weave a brighter future for Africa. By bringing together governments, international export credit agencies, multilateral development banks (MDB), development finance institutions (DFI), private insurance players and banks, and through innovative funding techniques this chasm can be bridged.
Banks like Standard Chartered are playing a key role in this effort.
To make a meaningful contribution in closing Africa’s large infrastructure gap, all the stakeholders must work together. Bi-lateral structures comprising of banks working with MDBs, DFIs and Export Credit Agencies (ECA) are already playing a key role in closing the infrastructure funding gap in many high-risk markets. However, when MDBs, DFIs, private insurance companies, ECAs and banks come together, they can provide new and innovative structures that offer acceptable risk vs return dynamics to all stakeholders that are investing in infrastructure projects. This helps to maximise impact and broaden investor reach.
Alper Kilic
Global Head, Project and Export Finance,
Standard Chartered
Collaboration meets innovation
It is often challenging to establish financing structures for raising long term funding in many high-risk emerging markets. MDBs/DFIs play an important role in working with the governments to identify priority projects which also satisfy investor appetite for risk and return and also fulfil ESG requirements. MDB/DFIs also contribute to the capital structure either through direct lending or guarantees.
Banks continue to be critical enablers because of their local network and on-the-ground presence, relationship franchise, technical expertise, and capital commitments to the projects. New and creative ways to structure finance for projects, for example introducing private insurance cover to mitigate certain components of payment risk, in addition to the credit support provided by MDB/DFIs, and establishing multi-tranche structures with support from ECAs can enable the governments to attract additional capital from the banks and other investors.
In a recent transaction to finance the development of critical water supply infrastructure in Angola, Standard Chartered brought together multiple stakeholders including The World Bank, African Trade Insurance Agency, Bpifrance Assurance Export, BNP Paribas, Credit Agricole, Credit Suisse, Société General, Santander and Helaba Bank with Norton Rose Fulbright and Allen & Overy as legal counsel.
Given the efforts by the governments in Sub-Saharan Africa and other emerging markets, in creating a conducive regulatory, economic and legal environment for investors, such collaborations can develop into repeated financing arrangements for infrastructure development projects there.
Safeguarding water supplies with a financial package
In the Angola water project financing the funding was provided under two facilities which amounted to USD1.1bn in aggregate from the lenders. The facilities benefitted from guarantees from the International Bank of Reconstruction and Development, insurance from the African Trade Insurance Agency and credit insurance provided by the French Export Credit Agency (ECA), Bpifrance Assurance Export (BPI).
This underscores how bringing together the right parties can support critical infrastructure investments. The project ensures safe water supply, which will help improve health outcomes and boost the resilience of the water supply system against climate shocks.
With investor appetite for projects linked to environmental, social and governance factors, one risk for funding across emerging markets is that other sectors like agriculture, transportation and education need to work harder to attract investment.
The good news is that the gap has been identified, it can be quantified, and financial institutions, governments and development organisations can work together to close it – in a sustainable way and with a long-term vision.
There is no lack of capital in the world, we just need to focus together to mobilise it. One of our partners shared an Angolan saying: if you want to go fast, you go alone, if you want to go further, you go with your partners. And when private-public collaboration meets innovation, you have a winning formula.
Alper Kilic
Global Head, Project and Export Finance,
Standard Chartered
Why it’s time to tap into Africa’s
credit market opportunities?
Why it’s time to tap into Africa’s credit market opportunities?
African countries are attracting international funding for development with new and innovative debt instruments.
Investors are waking up to African corporates that offer relatively high yields and a way into sustainable investing. At the same time, businesses across the continent are seeking capital to fund their business plans and, opening up to innovative financial structures. Furthermore, several African countries are also deepening their financial systems to make additional sources of financing available, and new classes of investors. These forces offer opportunities for institutional investors in a market that is ripe for growth.
While corporate bond markets remain relatively underdeveloped across Africa, they are increasingly being viewed as a realistic option for companies seeking growth on the continent or diversification of debt funding. Increased local and international investor interest and the backing of development finance institutions is helping to overcome previous stumbling blocks, like the rate of return, poor liquidity and geopolitical risks.
The African corporate bond market1 – defined as bonds issued by companies incorporated in an African country – was around USD149bn in July 2020, according to the International Capital Market Association (ICMA), dominated by businesses incorporated in South Africa, which made up more than USD95bn of the total. Other markets underscore the scope to grow: the US corporate bond market2 is USD10.9tn, while China’s is around USD7.4tn, ICMA data shows.
Innovative financing structures can help mobilise debt capital in Africa and allow corporations based on the continent to thrive. Like all emerging markets, there are unique challenges and opportunities, so working with experienced partners is essential to understanding the landscape and delivering optimal solutions.
Tony Pinches
Executive Director for Financing Solutions Team in Africa,
Standard Chartered
Spurring private investment
With no dearth of potentially profitable projects to underwrite, both businesses and investors in Africa are searching for new methods of financing.
Working collaboratively to spur investment because private sector capital is vital for closing the funding gap across the continent. Just 60 per cent of the financing needed3 to achieve the United Nations’ 17 sustainable development goals4 in low-and middle-income countries is being met, and in Africa this is as low as 10 per cent.
The success of Liquid Intelligent Technologies’ (LIT) recent USD620m bond sale5, which was led by Standard Chartered as a Global Coordinator, illustrates how Africa’s corporate bond market now has a global investor appeal.
The company, which provides communications solutions in 13 countries, mostly in Eastern and Southern Africa, sold the bonds with a coupon of 5.5 per cent, three percentage points lower than its inaugural 2017 bond sale, and the lowest ever for a single-B issued in Africa. It was also more than five times oversubscribed.
This shows the role global credit markets can play in funding Africa’s digital future. Many African corporate bond issuers are best in class in terms of the consistency and quality of their investor communication, accessibility to investors and ratings agencies and their prudent financial management.
Rob Mason
Senior Originator, Debt Capital Markets Africa,
Standard Chartered
The participation of Development Finance Institutions, or DFIs – specialist organisations that are usually owned by national governments – can also help bring investors along on projects. Even amid the pandemic, investor confidence in these institutions remained strong and African DFIs have raised capital in loan6 and debt capital markets using innovative mechanisms, like subordinated loans, which they have been in a position to deploy.
The inclusion of three DFIs – the International Finance Corporation, DEG and the Emerging Africa Infrastructure Fund (“EAIF”) – as anchor investors in the books of the LIT fundraising helped give international investors the confidence to join the sale by providing further confidence in the credit and generating deal momentum.
That LIT corporate bond issuance was part of a broader placing of USD840m, including a USD220m equivalent South African Rand term loan.
Such structures can help when local currency fluctuations risk hampering the corporation’s ability to service debt denominated in US dollars. And where there is little or no market for local currency corporate bonds, or such markets are more volatile – as is the case in many African countries – loans can make up any shortfall. Combining bonds and loans in this way helps to keep the overall cost of capital as low as possible.
Although not an ESG bond, LIT were keen to stress their ESG credentials to the market. Since the company is advancing a number of the UN’s development goals, it was able to attract ESG-minded investors, a major theme both now and looking ahead. A robust ESG strategy was also key for the participation of the DFIs.
African credit markets took a hit during the pandemic, but they’re coming back strongly. The continent’s low COVID-19 mortality rate and strong primary sector, together with higher yields and opportunities for green projects, has bolstered investor appetite in the credit markets, while issuers have been galvanised by low borrowing costs. We have a positive outlook.
Tony Pinches
Executive Director for Financing Solutions Team in Africa,
Standard Chartered
*Case study:* USD 1.1bn financing project to develop and improve water infrastructure in Angola
Case study: USD 1.1bn financing project to develop and improve water infrastructure in Angola
Learn how we helped Angola’s Ministry of Finance fund a transformational development project that brought together multiple stakeholders.
Background
Angola’s water supply infrastructure requires development, and the country faces significant challenges in providing access to safe and reliable water for the population. According to the World Bank, it ranks 138 out of 140 for reliability of water supply1. The country has an abundance of water, but its hydraulic infrastructure needs strengthening for reliability, capacity, and resilience.2
The situation is particularly acute in the region’s towns and cities, which are among the most rapidly urbanising in the world.3
Therefore the Government of Angola embarked on a transformational project in the capital city of Luanda for the development of water production, purification, transmission, storage and distribution facilities - comprising a water treatment plant, a transmission system, water storage facilities, distribution centres and installation of new networks and metered connections. Once completed, the Luanda Bita Water Supply Project is intended to improve access for over two million residents to potable water service in selected parts of South Luanda.
The project will also contribute towards meeting the United Nations’ Sustainable Development Goal 64, which relates to increasing access to clean drinking water and sanitation for all.
However, mobilising commercial financing has often proven a challenge in sub-Saharan Africa. Therefore, Angola’s Ministry of Finance engaged Standard Chartered -a bank with which it has a longstanding relationship to advise and coordinate USD 1.1 billion of financing to fund this project, and to bring together multiple stakeholders through a new and innovative structure.
Deal structure - collaboration and World Bank guaranteed financing
The financing has been structured as two separate facilities:
(A) USD 900 million, IBRD (International Bank for Reconstruction and Development) Guaranteed facility with Standard Chartered Bank acting as Sole Co-ordinator & Structuring bank, Joint Underwriter and Joint Initial Mandated Lead Arranger, BNP Paribas as Joint Underwriter and Joint Initial Mandated Lead Arranger and Crédit Agricole Corporate and Investment Bank as Joint Initial Mandated Lead Arranger. Société Générale and Credit Suisse acted as Mandated Lead Arranger. Norton Rose Fulbright acted as the Borrower legal counsel and Allen & Overy acted for the Lenders. In addition to IBRD (the lending arm of the World Bank Group), this loan is also guaranteed by the African Trade Insurance Agency. The loan sets a global record as the biggest World Bank guaranteed financing; and
(B) USD 165 million, BpiFrance Assurance Export guaranteed facility with Standard Chartered Bank acting as structuring & co-ordinating bank, book runner and mandated lead arranger. Santander and Helaba Bank came in as mandated lead arrangers into this facility. The facility will be used for financing design-build contracts awarded to Suez International and Saint Gobain PAM with assistance from the French ECA i.e. BpiFrance Assurance Export.
Unlocking capital for critical and sustainable infrastructure in sub-Saharan Africa
The deal has the distinction of being one of largest single term loan financings provided by commercial banks for an African sovereign during 2021.
The innovative financing structure of the Luanda Bita financing could also unlock more sustainable investment for other countries that need it most. This could include an increased appetite among insurers and investors for other projects in the region and provide a blueprint on how to structure future longer term, lower interest loans, potentially benefiting some of the world’s most underdeveloped markets. Standard Chartered intends to repeat the successful structure used in this project financing to unlock opportunities in other markets.
At a time when demand is surging for Environmental, Social, and Governance (ESG)-compliant investments,5 financings such as this demonstrate Standard Chartered’s ability to offer a path for aligning the Borrower’s financing need with the investor’s requirements. The financing structure for Luanda Bita can be replicated for other projects and clients as well with the involvement of the right partners.
If you want to go fast, you go alone, if you want to go further, you go with your partners.
Ottoniel dos Santos
Secretary of State for Finance and Treasury at the Republic of Angola
What is driving the global interest in Islamic Finance?
What is driving the global interest in Islamic Finance?
Rising trends are broadening the appeal of Islamic finance among global investors.
Islamic finance continues to gain momentum with borrowers and investors globally, particularly driven by an increasing understanding of the asset class, a strong alignment of Islamic Shariah core principles with ESG principles, and the continuing rise in Islamic liquidity with core, global investors. The rapid rise in Global Sukuk volumes has continued to win over non-Middle Eastern and Malaysian, non-Islamic investors, and this globalisation trend is expected to continue further on the back of the natural synergies between Islamic Finance principles and sustainability.
Islamic finance, or Shariah-compliant finance1, is a way to manage money in keeping with the moral principles of Islam. A central theme of these principles includes the forbiddance of ‘money to make money’ transactions, the need to share risk and the need to ensure that investments have a social or ethical benefit to society.
Malaysia, Indonesia, Bahrain, UAE and Saudi Arabia are the leading countries according to the 2020 Islamic Finance Development Report2 measured using indicators such as the quantitative development, knowledge, governance, CSR and general awareness. However, geographic diversification continues to be a core theme as the asset class grows in size and influence and spreads beyond Muslim majority countries to markets such as UK, Hong Kong, Luxembourg and South Africa. The report forecasts Global Islamic finance assets to reach USD3.7 trillion by 2024, up from USD2.9trn in 2019.
Much of that growth is expected to come from new markets such as Africa, as countries begin to put systems in place to issue Shariah-compliant sovereign debt.
Islamic finance is gaining momentum and spreading to new territories. The next frontier is Sub-Saharan and North Africa, and banks like Standard Chartered are at the forefront of helping many of these countries come up.
Ahsan Ali
Managing Director and Head of Islamic Origination,
Standard Chartered
Evolving products and Sukuks on the rise
As the asset class has evolved, so too have the product structures, becoming increasingly complex, and offering tailored features to meet the needs of a growing lender and investor base.
An increasingly popular financing product has been Islamic financial certificates, which are similar to bonds but comply with Islamic religious law, known as Sukuks3. Sukuk volumes have grown rapidly and gained substantial global acceptance amongst investors and issuers.
Unlike with a non-Islamic debt, where the debt holder’s return for providing capital to the issuer takes the form of interest, sukuk cannot bear interest. The sukuk holder’s return for providing finance is a share of the income generated by the assets.
The UK was the first western country to issue a sovereign Islamic bond4 in 2014. This year the country issued its second sovereign sukuk, selling GBP500 million to institutional investors based in the UK and in the Middle East and Asia.
Sukuk issuance is expected to power on in the second half of 2021, with low market rates and abundant liquidity. Global issuance could increase5 to USD155 billion this year, up 11 per cent compared to 2020, according to calculations by S&P Global Ratings.
And it’s not just sukuks, Islamic finance is continually evolving, enticing new kinds of investors with innovations in structuring and with regulatory developments, for example AAOIFI Shariah Standards6.
Central to that growth will be making Shariah-compliant products easily accessible and standardising compliance processes.
There is a growing demand in this space for products linked to environmental, social and governance (ESG) factors. The core building blocks of Islamic finance are already in keeping with ESG, for example the need to benefit society and to avoid potentially harmful or exploitative practices or those that cause damage to the environment.
While demand for sustainability-linked and green sukuk issuance will likely be high, volumes of Shariah-compliant instruments like this remain relatively low for the time being. The Islamic Development Bank issued a sukuk7 worth USD2.5bn this year and said it would use 10 per cent of the proceeds to finance green projects and the rest for social development programmes.
In another sign of what’s to come, this year Malaysia became the first country to sell a dollar sukuk linked to sustainability8, when it priced USD800m of 10-year sustainability Islamic finance notes.
These deals and those issued by corporates underscore the role Islamic finance can play in helping boost economic recovery after COVD-19, by helping to promote or revive the SME sector.
Islamic Finance and the concept of Sustainable Finance have always been in harmony. This means that leveraging the strengths of both can generate strong returns for both issuers and investors while also building a better world for all of us.
Souad Benkredda
Global Head of Strategic Investors Group Sales,
Standard Chartered
*Case study:* Investing in supranational bonds in local EM currencies
Case study: Investing in supranational bonds in local EM currencies
In the wake of COVID-19, supranationals such as the Asian Development Bank (ADB) have stepped up their lending and support in developing member countries and this is made possible by bond issuance, including that denominated in Emerging Market currencies. The wide range of investors in these bonds therefore play a critical role in steering capital to where it is urgently needed. Standard Chartered has been working closely with a number of supranationals to issue such bonds and is among the market leaders for issuance in Asian currencies.
Uncovering new investment opportunities in Asia’s changing credit landscape
Uncovering new investment opportunities in Asia’s changing credit landscape
Find out how Asia’s changing credit landscape is uncovering opportunities for international investors
Geopolitics, a shift to sustainable finance and an uneven recovery from the pandemic are reshaping Asia’s credit-market landscape, uncovering opportunities for investors around the world.
Before the onset of the COVID-19 pandemic, the Asian credit market had been growing substantially in the decade since the global financial crisis. Annual issuance of cross-border bonds skyrocketed1 to USD575 billion in 2020 from USD107bn in 2006, according to the International Capital Market Association.
The potential for more growth is ripe for all to see, with international deals making up around 20 per cent of bond issuances from the region2, compared with around 40 per cent across the world. While this is partly due to a preference for Asian issuers to finance onshore, structural changes brought about by the pandemic, the relatively high yields on offer and the opening up of China’s markets are attracting a fresh wave of international investors.
At the same time, a new set of corporate issuers are coming to market, attracted by low interest rates. All this adds up to a new phase, as the asset class starts to move beyond COVID-19, characterised by a focus on environmental, social and governance (ESG) factors.
After the pandemic shook investor confidence in some areas of Asia’s credit landscape, sentiment is now buoyant and demand continues to grow. We’re entering a new chapter now, but there are echoes of a previous era – low rates and altered supply chains, which are still to run their course through the market.
Duncan Robinson
Managing Director and Global Head of Credit Flow Trading,
Standard Chartered
The outbreak of COVID-19 pushed the world into a health crisis and an economic crisis at the same time: shredding assumptions about growth, bringing nations across the world to a standstill and shuttering companies. In response, policymakers and monetary authorities cut interest rates, guaranteed loans and put in place a swathe of support measures3 which distorted markets, including Asia credit.
And even as the region leads the economic recovery, growth is likely to remain uneven, as China powers ahead and other Asian economies struggle. Alongside the patchy rehabilitation from the pandemic, investors are still grappling with uncertainties related to geopolitical tensions and the impact of sanctions on some companies.
The pandemic has also accelerated some trends that were already in train, both in the region and around the world. While the way we manage our lives and businesses were increasingly migrating online, this shift was exacerbated as COVID-19 swept around the globe.
Shriram Transport, which provides finance for the commercial vehicle industry in India, used the first lockdown to build out its digital infrastructure and platforms, reaching much of its customer base – which is largely made up of individuals – by mobile phone. The company has now started using blockchain technology4 to issue its fixed deposit certificates.
The company has also issued social bonds5, raising USD500 million last year in India’s first international public social bond issuance. In a sign of the strength of demand for assets linked with social benefits among international investors, the final order book was in excess of USD2.2bn – more than four times oversubscribed.
This year, the company came to market again for USD725m in secured notes, aided by Standard Chartered, again as part of its social bond6 issuance. The proceeds will help employment generation7 through micro, small and medium enterprise financing and microfinance. Positive social impact will be generated by improving financial access for the underbanked, who can find it difficult to access conventional financial services.
Across the region there has been an increase in sovereign and corporate supply, partly to plug gaps created by the pandemic. Total bond issuance is up regionally, while the issuance of bonds tied to ESG in the Asia-Pacific region has more than doubled to reach a record USD69bn this year.
There’s been a significant increase in supply from the Philippines – both in terms of sovereign8 and corporate credit – as the nation staves off the economic impact of the pandemic, which pushed up demand for financing.
COVID-19 has also brought a new wave of issuers to market, as companies that once had strong cash positions on their balance sheet find their revenues drying up. Airports are a key example here, with cash flows decimated by the pandemic’s impact on the tourism industry.
Without their regular sources of funding, a number of airport authorities across Asia have come to market more regularly since the pandemic struck. The Airport Authority Hong Kong9 sold bonds to US-based investors for the first time, raising USD1.5bn to fund capital expenditure on a third runway. It raised USD900m in 10-year notes and USD600m in 30-year bonds.
Changi Airport – one of the world’s busiest hubs – raised capital10 via its first medium-term note offering, while Delhi International Airport11 issued a USD450m green bond.
China and the Southbound bond connect
Investors are continuing to make capital available for public and corporate projects throughout the region and this is expected to continue, as China’s recently launched Southbound Bond Connect12 scheme enables more investors to seek offshore assets.
More than 2,000 global institutional investors are approved to use the northbound Bond Connect13 to access China’s bond market and the Southbound Bond Connect will allow China-based investors to buy offshore debt.
This will widen the scope of assets in the region considerably. China’s onshore bond market14 is the second largest in the world, after the US, while ICMA estimates the offshore corporate bond market to be approximately USD752bn, or around 30 per cent of the total APAC international corporate bond market.
Issuance by Chinese companies is skewed towards real-estate financing, and there have been some high-profile defaults that threatened to undermine sentiment15.
The increasing number of defaults means that Chinese investors may look at other parts of the region and diversify to countries like the Philippines, India and Indonesia.
With the Southbound bond connect having opened, many expect that demand will remain robust across the region. And even while more money is expected to emanate from China, few foresee a flood, since the most sophisticated and engaged issuers from China have already found ways to access capital.
Concerns about geopolitical tensions also appear to have done little damage so far, with with many companies from China– including Alibaba and Tencent – tapping the market in high-value and well-received deals.
Last year was a record for issuance volume and it appears that the Sino-US tensions are not deterring investors. Investors are keeping the evolving situations in mind, but they are still seeing value in credit all across the region.
Duncan Robinson
Managing Director and Global Head of Credit Flow Trading,
Standard Chartered
*Case study:* Project financing for Vietnam’s largest solar plant through USD186 million ADB loan structure
Case study: Project financing for Vietnam’s largest solar plant through USD186 million ADB loan structure
Find out how Standard Chartered financed the country’s largest renewable energy project by offering debt structuring expertise and long-term interest rate hedging.
Background
The government of Vietnam is seeking to transform the country’s energy supply and power infrastructure. Under a master power development plan1, the country has outlined a roadmap for a transition from fossil fuels to renewables, and an upgrade of the national grid to aid the safe and efficient distribution of electricity. As of 2020, solar and wind capacity in Vietnam was 16.6 gigawatts (GW) and 0.6 GW, respectively. By 2030, Vietnam intends to increase solar capacity to 18.6 GW and wind capacity to 18.0 GW.2
A significant part of this plan is the 257MW Phu Yen Solar Power Plant Project. Located in Hoa Hoi, Phu Yen Province, it is the largest operating solar plant in Vietnam, and one of the largest in South East Asia. The project is expected to help reduce 123,000 tonnes of carbon dioxide emissions per annum.
The facility is operated by majority owner B.Grimm Power, a core client of Standard Chartered Bank, and Truong Thanh Vietnam.
Deal structure and Standard Chartered’s role
The Asian Development Bank (ADB) provided direct financing under an A-loan facility, with Standard Chartered (and other regional commercial lenders) participating in the ADB B-loan facility.
To mitigate residual risks under the Power Purchase Agreement, an appropriate risk allocation structure was implemented between the parties.
Standard Chartered is the only international lender involved, offering debt structuring expertise and long-term interest rate hedging through its onshore operations in Vietnam.
The deal is Asia’s first green B loan certified by the Climate Bonds Initiative.3
This deal has set a precedent for the successful funding of renewable energy projects in the region. Projects that may have struggled to attract capital under more traditional financing structures are now more likely to progress, further increasing renewables capacity in a region still heavily reliant on coal to produce electricity.
The financing structure paves the way for further development of the green energy sector in Asia, with Standard Chartered already working with B.Grimm Power on a follow-up deal using the same structure.
Standard Chartered is the first international bank to structure such a large-scale renewable energy transaction in this growing sector in Vietnam. The transaction has been awarded the Green Project of the Year Award in Vietnam (The Asset) and Standard Chartered Bank awarded Project Finance House of the Year in Vietnam (The Asset) – further acknowledgement of Standard Chartered’s commitment to financing a low-carbon future.
Supply chain financing:
an effective way to finance
developing markets
Supply chain financing: an effective way to finance developing markets
Supply chain finance is emerging as an effective instrument to reduce financing gaps in developing markets.
Offering low risk and good returns, the outlook for supply chain finance (SCF) is positive, buoyed by scope to expand in developing economies, channel capital where it is needed most and support more sustainable trade.
SCF is not a new form of financing and has been used for a long time by banks focused on investment-grade companies with the aim to providing financial access and stability into their supply chain. While recently SCF has seen emergence of non-banking providers, banks continue to have a key role to play in the financing of SCF, particularly in emerging markets and for small and medium-sized companies, where there is significant potential to expand and develop the market. Banks bring governance, transparency, expertise, and networks as well as access to fintechs and a wider pool of investors, especially the banks who have adapted well to the emerging trends, in addition to the years of trade finance expertise they already have.
Properly financed and robust SCF is not just a critical cog in the wheel of global trade, it can also help kickstart growth in developing countries − giving assurance to enterprises and business owners who might otherwise struggle and helping to encourage and create more sustainable supply chains.
Growth is also being spurred1 by an ongoing investor hunt for yield and rising demand from corporates seeking to maximise the impact of their working capital as they recover from the pandemic.
The optimism is clear: supply chain finance is a very attractive asset class, and it’s a crucial part of the ecosystem. New players are bringing different approaches, new technologies and new ways to finance. Given its unique structure, SCF can incentivise the participation of financiers who may otherwise be unable to support developing markets, so there are exciting times ahead.
Nicolas Langlois
Global Head of Trade Distribution,
Standard Chartered
Developments in emerging markets
SCF as an asset class is emerging strongly in developing countries, where there’s a need to free up finance and a current lack of products to mitigate risk.
The World Trade Organization and the World Bank have stressed the vital role that trade plays2 in integrating developing countries into the global economy. As per the Asian Development Bank, the role is even more crucial since it says shortages of trade finance3 put at risk seven of the United Nations’ 17 Sustainable Development Goals.
SCF products could “improve the prospects for millions of entrepreneurs4 who are held back by a lack of fixed collateral and limited offerings of appropriate credit products by financial institutions,” according to the World Bank, which also sees scope for financial institutions in many emerging economies to offer a broader range of these products.
But while there is much optimism about the opportunities and the scope to channel capital to developing countries, the collapse of UK- and Australia-based financial services company Greensill Capital5 shone a spotlight on some deficiencies and threatened the reputation of the industry.
Despite Greensill, SCF as an asset class remains a positive option for investors and offers much potential for expansion. The Greensill story also paved the way for an improved understanding of the area, better investor education, while also underscoring the need for robust practices, improved infrastructure and better credit assessments.
Banks like Standard Chartered will play a leading role in helping shore up credibility of these processes. Not only do they bring transparency, expertise, and well-developed networks, they also offer access to technology developed by their fintech partners and a wider pool of investors.
Looking ahead, blockchain technology and asset tokenisation6 can also help to create more resilient digital supply chains by providing delivery assurance to all parties. This will reduce pain points including document delays and fraud, by increasing transparency and visibility all along the supply chain, according to a paper from Cognizant.
Collaboration between technology solutions companies – including AI and blockchain applications – and banks, the traditional providers of liquidity to SCF, can also help. The banks bring confidence, finance, infrastructure and credibility, while the tech companies bring greater access to data and better transparency, that could help attract a wider pool of investors.
Standard Chartered is helping lead the way with these tech developments, backing the Asian Development Bank’s first credit guarantee using distributed ledger technology7, with the first cross-bank Letter of Credit transaction between Vietnam and Thailand.
The sense of optimism is evident from the growing number of corporates willing to consider entering the market. Additionally, lenders are increasingly guiding their borrowers towards improving their environmental, social and governance (ESG) credentials and that will strengthen the market.
Standard Chartered employs sustainable trade finance solutions across Asia, Africa and the Middle East, Europe and the Americas, encouraging clients to improve their disclosure, reporting and definition of use, while meeting their ESG goals. SCF is a key area of focus for this work.
Recent turbulence in the SCF market has opened opportunities and underscored that there is no substitute for good and effective credit underwriting. Robust operational processes and strong underlying infrastructure are critical to monitoring deals throughout their life cycles.
Standard Chartered is optimistic about the outlook. As the global economy recovers, the risks in emerging economies will come down, and more institutional capital will flow to these areas. The right banks will be at the centre of this expansion, along with the key ecosystem partners.
Even so, this will require better regulation and education on the investor side to broaden not just the range of providers, but also institutional investors and alternative sources of capital. A better understanding of the origination process and how credit underwriting works are key areas to work on.
There is a flight to quality in supply chain finance underway and that’s led to a lot more awareness among investors and investor education. The outlook for this asset class is positive: there is more blue sky than there are clouds.
Nicolas Langlois
Global Head of Trade Distribution,
Standard Chartered
Asia opens up to more Term Loan B facilities
Asia opens up to more Term Loan B facilities
Find out why Asian borrowers and global investors are embracing Term Loan B credit?
Term Loan B (TLB) structures are offering borrowers in Asia an additional way to access capital and are growing across the region, where the market is less developed than in Europe and America. Historically low borrowing costs are making the loans more affordable and their relatively strong yields are luring investors to places that were once off the TLB radar.
High yield borrowers in Asia are seeing the benefits of the instruments as they gear up in the wake of the pandemic. Their appeal among Asian borrowers and lenders is growing as the regional recovery from the pandemic downturn has gained earlier and swifter momentum than in other parts of the world.
TLBs are senior-ranking term loans1 with bond-like characteristics, but are placed with institutions and actively traded. They are often issued in conjunction with revolving loan facilities and lent to speculative-grade companies. The proceeds are used to leverage corporates, but also for capex and growth.
The popularity of these instruments is growing among investors because they offer higher yields and good risk-adjusted returns. The secondary market isn’t very liquid, although risk appetite within it does ebb and flow.
In the constantly evolving capital markets, Term Loan Bs open up opportunities for issuers and investors to access a multi-tiered capital structure which doesn’t really exist yet in Asia. This means they are enabling better price discovery for investors and reducing cost of capital for issuers.
Molly Duffy
Head of Financial Markets Europe and Americas,
Standard Chartered
Until recently, the use of Term Loan Bs in the Asia region2 was confined largely to Australia. Now, investors seeking higher yields are being pushed toward new markets and they’re also becoming more comfortable with the regulatory stability of emerging markets3, especially Singapore and Korea.
One of the attractions for borrowers is the flexibility of the TLB. They have fewer safeguards to protect lenders and offer an alternative source of capital in jurisdictions with smaller, less liquid public markets.
Asia is expected to follow the path of Europe, which lacked a cohesive legal code to give institutions the confidence to invest. However, Europe modelled its regulatory approach on UK law – there is no equivalent in Asia. Some loans have been agreed according to precedents set in Europe and the US.
Good investor communications and strong assessments by ratings agencies can help promote TLBs to a wider range of investors in Asia. Other enhanced features, like building covenants into investor packages, could help address concerns about credit quality. They could also help make investors more comfortable with TLB products from emerging markets that are considered to come with higher risks.
There are signs of growing investor comfort with these products, and this has been underscored by recent successful deals.
Singapore ride-hailing and food delivery firm Grab raised USD2bn4 from a term loan this year. The five-year senior secured loan was increased from the initial USD750m after the company secured commitments from a wide range of international institutional investors.
India-based hotel and rental platform OYO secured a USD660m loan5, in a deal it said was oversubscribed by investors. The company initially secured the agreement in May, but then increased it due to investor demand.
GEMS, a for-profit private education provider in the UAE, recently added6 USD150m to its USD750m TLB, in another deal that underscores the growing popularity of these loans.
Term Loan Bs are attractive to investors because they’ve come to occupy a good, solid space in terms of corporate structures. They also offer better risk-adjusted returns than other forms of corporate credit. While they’re well adopted in Europe and America, as a pool of liquidity they could offer Asian companies affordable ways to access capital − and the investor appetite is certainly there.
Molly Duffy
Head of Financial Markets Europe and Americas,
Standard Chartered
