Asia Pacific: Sustainability driving the Infrastructure and Structured Finance market
Financial market participants are becoming increasingly conscious about the long-term systemic risks posed by uncontrolled climate change and broader sustainability risks, highlights Jonathan Drew, Managing Director, Sustainable Finance, Real Asset and Structured Finance group at HSBC in Hong Kong. “Put simply, sustainability risks - such as extreme weather, excessive pollution in cities, deteriorating health, loss of biodiversity and productivity of natural resources, and the need to change itself - will have financial consequences, will impact valuations and could impact the ability of clients to service their debt. Financial market regulators are demanding that financial institutions address these risks and wider society is demanding that businesses and financial institutions make the transition towards a more sustainable and lower carbon business model,” he says.
We are now seeing action being taken across the region. APAC regulators are also adopting progressive policies to encourage organisations to embrace sustainable business practices. For instance, Hong Kong’s Securities and Futures Commission (SFC) issued guidance urging investment funds running ESG (environment, social, governance) strategies to become more transparent with their clients about how they incorporate and apply ESG into their operating models. 1 The Hong Kong Stock Exchange has raised the bar on ESG related disclosure requirements and the Monetary Authority of Singapore (MAS) announced that it will publish Environmental Risk Management guidelines for banks, insurers and asset managers in Q1 of 2020. 2
Elsewhere, the People’s Bank of China (PBOC) is pushing through with its own green bond standards.3 China is the regional leader in the green bond market and has seen its issuances increase year-on-year by 49 per cent since 2018.4 Last year USD30.1 billion of green bonds were issued in China alone, 5 a massive increase from 2015 when just USD500 million was raised following one single issue in the whole of APAC. 6
“The risks of not being sustainable in today’s market are vast, but I am optimistic about the future of infrastructure and structured finance market in APAC. There is going to be a mass replacement of machines that burn fossil fuels for power generation, in industrial and manufacturing processes, as well as in infrastructure and the delivery of services, with low carbon and renewable alternatives. This process will happen at different but accelerating speeds in different sectors as technologies develop and mature leaving old technologies financially stranded. Nearly everything – whether it is our cities, methods of transportation or food production – is going to undergo massive changes, and there needs to be financing to support the required investment,” says Drew.
Put simply, sustainability risks - such as extreme weather, excessive pollution in cities, deteriorating health, loss of biodiversity and productivity of natural resources - will have financial consequences and could impact the ability of clients to service their debt."
HSBC’s Infrastructure and Real Estate team led a USD300 million 14Y MIGA-covered loan for the construction of a fertilizer plant in Polash under the district of Narsingdi in Bangladesh to be implemented by Bangladesh Chemical Industries Corporation (BCIC), the state-owned fertilizer manufacturer in the People’s Republic of Bangladesh. HSBC Issuer Services was appointed to be the Facility Agent on the transaction.
Bangladesh is an agricultural powerhouse where the agriculture and forestry sector accounts for more than 10 per cent of its GDP, with approximately 40 per cent of the workforce engaged in agriculture. In addition to an increasing demand for fertilizer due to the country’s recent growing economy and rising population, BCIC’s aging existing plants have caused the producer to rely on the import of fertilizer to satisfy part of the strong demand. Under these circumstances, this project is expected to allow the BCIC to increase domestic production, making a significant contribution to the economic development of Bangladesh. Furthermore, the project could help reduce the environmental impact and increase urea production, by utilising the new CO2 capture technology.
HSBC led a USD200 million inaugural club loan for VPower, a Hong Kong-listed distributed power specialist and Asia’s leading distributed power station owner and operator, supporting emerging markets’ course to transit to lower carbon-emitting power generation solutions. HSBC’s Issuer Services team served as the Agent Bank for the transaction. Throughout the loan arrangement process, HSBC has championed strategic discussions around sustainable finance and acted as the Sole Climate Action Structuring Bank for VPower, helping the client to tailor its first Climate Action Finance Framework which successfully obtained the HKQAA7 certification. The loan has a Climate Action tranche which is to be used for refinancing projects that contributes to improve carbon emitting mix in emerging markets.
Mong Duong 2 (MD2) is a power plant in Vietnam with a project value of USD2.1 billion. In 2011, HSBC Issuer Services’ Hong Kong team was appointed as the Security Trustee and Account Bank for the project. In 2019, the legacy project financing loan was refinanced via a new Project Financing Loan as well as RegS 144A USD bond. HSBC has been appointed again as Account Bank and Security Trustee.
How can trustee and agency roles play an active role in green bonds?
In light of the growing focus on sustainability, Drew highlights that HSBC Issuer Services is an excellent complement to the bank’s infrastructure and structured finance division. “Clients primarily come to banks for financing but they realise very quickly there is also a transactional component to these deals. In infrastructure and structured finance, it is essential that the operations underpinning transactions are efficient and that is where Issuer Services come in.” Jonathan Drew.
Recognised as the “World’s best bank for sustainable finance”8, HSBC has been an active an industry leader in recent years, supporting the issuance of green, social and sustainable bonds. Moreover, there has also been a significant increase in infrastructure finance activity focusing predominantly on energy transitioning in APAC. “We have seen a number of energy transformation programmes as industries move away from pure coal to cleaner coal, natural gas and renewables,” says Suvir Loomba, Head of Issuer Services, APAC at HSBC.
Use of Proceeds, Management of Proceeds and Reporting form three of the four core Green, Social and Sustainability Bond Principles. It is also at the heart of the activities performed by a trustee or an agent in any capital markets transaction. The bank’s Issuer Services unit specialises in providing onshore and offshore agency and trustee services for bonds and capital financing transactions. The division has evolved its capabilities to support clients’ green bonds transactions, particularly with regards to the application of the green bond principles.
“The green bonds and green lending principles place a strong emphasis on disclosure and use of proceeds by issuers or borrowers. Clients who issue or borrow under these principles are expected to abide by obligations such as prompt disclosure of information, monitoring the usage of the proceeds and ensuring they are used strictly for the purposes stated in the terms. Therefore, appointing an independent, qualified trustee or an agent becomes important,” explains Ganesh Iyer, Global Head of Escrow Product at HSBC Issuer Services. Experienced trustees and agents who understand the principles, can play a leading role in helping clients disseminate information promptly and as transparently as possible.
“As part of our involvement in the transaction, we also monitor the cash flows associated with the bond or the loan and assist our clients in subjecting them to the documented terms,” says Iyer.
While a number of agencies already provide this service, issuers and lenders can gain additional advantages in the complex value chain of the transaction by appointing a banking trustee or agent to handle reports, updates and coordinate the chain of communications with the multiple parties involved. “Borrowers and lenders want transparency and regular information flows during the lifecycle of a transaction. This is something which Issuer Services as an agent provides,“ he adds.
"As more opportunities develop around the Belt and Road Initiative, there will be an even greater need for ancillary services such as escrows which can be used by market participants to safeguard their assets during transactions."
Belt and Road Initiative: Ushering in a new development wave
Since its inception back in 2013, more than 1,800 projects have been launched in 130 countries as part of China’s ambitious Belt and Road Initiative (BRI) scheme, a long-term initiative designed to promote trade, financial and cultural connections between China and its international partners. 9 These have included major infrastructure projects across Nigeria, Greece and Bangladesh. “HSBC has played a major role in supporting the financing of a number of BRI projects,” comments Loomba. In fact, the bank arranged USD525 billion of cross-border financing involving China between the start of 2017 and September 2019. 10
As of 2018, HSBC was acting as both adviser and financing partner in more than 100 BRI programmes. 11 “As more opportunities develop around the BRI, there will be an even greater need for ancillary services such as escrows. As deal flow grows as a result of BRI, escrows can be used by market participants to safeguard their assets during transactions,” says Loomba.
Drew is equally bullish on the region’s potential. “Asia is home to a number of rapidly growing markets with huge populations, and it is an opportunity that we ought to seize.”
HSBC Issuer Services has embarked on a strategic programme to expand its escrow footprint across prominent BRI locations including Bangladesh, Vietnam, the Philippines, Malaysia and Sri Lanka.
In the Infrastructure and Structured Finance markets, the use of escrow accounts can be applied in a variety of scenarios. For instance, HSBC Issuer Services have supported clients requiring an escrow account to place funds in the decommissioning of a wind farm. HSBC’s clients have also been using escrows in the abandonment and decommissioning of upstream oil and gas facilities.
To find out more about HSBC’s escrow capabilities, follow #HSBCescrow on LinkedIn.
MENAT: A slower market but plenty of opportunities
Although MENAT (Middle East, North Africa, Turkey) markets have seen a decline in export finance volumes in 2019, there is still an abundance of opportunities in the region. While financing for real estate construction in countries such as the UAE has dropped significantly – owing to the general oversupply of housing - Alyson Henshaw, Head of Global Banking for Oman at HSBC, says there is still a regular stream of transactions underway in MENAT. In particular, she says the aviation and natural oil and gas sectors have seen a lot of activity. “We have seen a growing trend of a number of national oil companies seeking out ECA (export credit agency) funding as they look to procure new sources of liquidity,” she adds.
"Borrowers and lenders want transparency and regular information flows during the lifecycle of a transaction. This is something which Issuer Services as an agent provides."
The energy transition in MENAT
Sustainability is becoming an increasingly important issue in MENAT. Driven by a combination of evolving regulations, changing investor behaviour and growing awareness about the potential risks of stranded assets, Henshaw says clients are now actively seeking HSBC’s support in helping them to ‘green’ their businesses. “Attitudes to sustainability have changed markedly over the last 12-18 months,” she says. In response, a number of banks are encouraging clients to embrace sustainability, and are increasingly offering green and sustainability linked products to clients.
Henshaw expects growth in sustainability linked deals to continue as awareness around the theme increases in MENAT. “Local companies have woken up to the issue of transition risk and they are trying to diversify their businesses and prepare for the future,” acknowledges Henshaw.
Diversification could usher in an infrastructure boom
As oil prices depreciated in 2014, commodity and hydro-carbon dependent markets such as Saudi Arabia realised they needed to diversify their economy. Key to this goal is the government’s Vision 2030 scheme, a sweeping reform initiative that aims to reduce Saudi Arabia’s historic reliance on oil and instead promote new industries and develop a viable private sector. Reports suggest there is approximately USD429 billion earmarked for major infrastructure and industrial projects as part of Vision 2030. 12 “There is a lot of optimism that export finance will flourish in Saudi Arabia once Vision 2030 takes root. We expect to see increased interest in ECA financing to follow,” she says.
|HSBC was the ECA co-ordinating and documentation bank on a transaction involving the Kuwait National Petroleum Company (KNPC). Conscious of the growing oil price volatility, KNPC embarked on an ambitious USD14.5 billion scheme to modernise and upgrade two of its refineries, in order to deliver efficiencies and minimise its environmental footprint. 13 Funding for this transition was provided through seven ECAs and 11 banks across six facilities.|
In addition, Henshaw believes smart city development in the Middle East could also lead to more deal activity in the ECA world. One of the more ambitious endeavours planned under Saudi Arabia’s Vision 2030 programme is to develop a new USD500 billion smart city – known as Neom – in the north-western province of Tabuk. Proponents say the city, which will be spread over 26,000sq km, will lead the way in renewable energy production and disruptive technologies. Elsewhere, the Egyptian authorities are also investing USD58 billion in their own new administrative capital 45km east of Cairo, which is projected to become a new centre for government and finance. 14 It is hoped this city will ease some of the pressure on Cairo, whose infrastructure is struggling under the weight of its rapidly expanding population.
Local companies have woken up to the issue of transition risk and they are trying to diversify their businesses to prepare for the future."
HSBC Issuer Services: Committed to MENAT
A number of local initiatives in MENAT – principally Saudi Arabia’s Vision 2030 and Dubai Vision 2021 – are likely to result in an upswell of investment into infrastructure, transport, renewable energy and advanced technologies. Moreover, the region is also well placed to tap into some of the opportunities presented by China’s Belt and Road programme.
HSBC has a long-standing history servicing MENAT markets and clients. Its Issuer Services unit is investing heavily into expanding its local footprint, with established offices already in Bahrain, Egypt, Saudi Arabia and the UAE. In 2020, Issuer Services will be strengthening its regional presence by launching new operations in Kuwait and Oman. In addition to providing customised cross-border and domestic-market specific services to clients through its extensive MENAT network, the bank is well positioned to provide agency and trustee solutions for clients exploring MENAT trade corridors and financing opportunities. “Issuer Services is a vital component to our product offering as it allows us to provide a unified one bank solution for customers rather than having them face off to multiple providers, particularly on sophisticated transactions,” Henshaw says.
To find out more about HSBC Issuer Services:
- Visit our website: www.gbm.hsbc.com/issuer-services
- Follow us on LinkedIn on the HSBC Global Banking and Markets page
- Contact us: APAC – email@example.com; Europe – firstname.lastname@example.org; Americas – email@example.com
1 SFC (April 11, 2019) SFC publishes guidance on enhanced disclosures for green or ESG funds
2 MAS (November 11, 2019) “Green finance for a sustainable world” – keynote speech
3 Reuters (April 11, 2019) Hong Kong regulator says ESG funds must justify their green credentials
4 Climate Bonds Initiative – China Green Bond Market Newsletter H1 2019
5 Climate Bonds Initiative – (January 16, 2020) Green bonds reach record USD255 billion for CY 2019 – new milestone
6 Financial Times (October 28, 2019) Asia-Pacific issuance of green bonds hits record high of USD18.9 billion
7 Hong Kong Quality Assurance Agency
8 Euromoney Awards, July 2019
9 HSBC (September 25, 2019) Belt and Road award for HSBC
10 HSBC (September 25, 2019) Belt and Road award for HSBC
11 HSBC (June 14, 2018) Funding the Belt and Road Initiative
12 CNBC (January 18, 2019) Saudi Arabia seeks more than USD425 billion in investments for massive infrastructure program
13 GTR Review (April 26, 2018) GTR Best Deals 2018
14 Reuters (May 13, 2019) Egypt’s new desert capital faces delays as it battles for funding