Governments in Asia are under increasing pressure to build infrastructure to sustain growth but face bank financing constraints, prompting Moody’s Investors Service to urge institutional investors to help provide long-term funding for the region’s projects.
The global ratings agency said in a statement on Tuesday institutional investors and international credit rating agencies can play a vital role in addressing the challenges to Asia’s infrastructure finance needs.
“Institutional investors are needed to increase funding diversity and provide longer tenor debt, as well as to reduce reliance on bank debt and government funding,” Walter Winrow, Moody’s managing director for Global Project and Infrastructure Finance, was quoted as saying in a statement released to the media from Singapore.
Winrow made the statement in a speech at the World Bank-Singapore Infrastructure Finance Summit 2014 held on Tuesday.
He mentioned the often relatively short tenor of debt and the evolving nature of the region’s regulatory environments as among the key credit challenges for infrastructure project financing in Asia.
But he pointed to their limited ability to assess credit risk for infrastructure assets, particularly in Asia, given the region’s diverse regulatory, political and socio-economic environments.
“Long-term institutional investors are well suited to the long-term, stable nature of infrastructure projects, but access to transparent and reliable information is needed to increase investor confidence in the sector,” Winrow said.
This is where international credit rating agencies can also play a role—by helping develop secondary market liquidity for project finance loans for the region, he said.
Credit ratings are seen as useful tools in promoting secondary market liquidity because they are readily available and provide a globally comparable point of reference that is able to encourage a deeper understanding of credit risk.
Winrow cited Moody’s Project Finance Bank Loan Default Study, which shows that the marginal default rate for project finance bank loans declines over time and recovery rates become higher than for general corporate credit.
“Our default study shows that the structural features of project finance are proving effective at mitigating losses, particularly in emerging market transactions,” he said.
However, the results of the Moody’s study show a marked difference between the average years to emergence-from-default for projects located in countries inside the Organization for Economic Co-operation and Development (OECD) (1.9 years) and non-OECD countries (three years).
“This result mainly points to differences in institutional structures and legal processes between developed and developing countries,” Moody’s said.