The objectives are:
a. To help develop infrastructure capital markets as an asset class through the creation of investable debt securities in the Asian infrastructure sector: The project’s primary objective is to create debt securities backed by infrastructure loan assets for sale to institutional investors.
b. To mobilize a new pool of institutional capital for Asian infrastructure: Banks are a predominant source of private sector financing for infrastructure projects in Asia but are limited in ability to continuously increase such long-term lending due to a preference for shorter maturities as a result of regulatory constraints imposed by Basel III. Institutional investors have significant assets under management that could match the long-term nature of infrastructure assets. The ability to address existing market frictions associated with investing in infrastructure debt would help crowd-in this alternative source of capital.
c. To support the recycling of infrastructure lending of banks’ balance sheets: A secondary objective is to provide banks which lend to infrastructure projects a way to free up their balance sheet tied up in infrastructure loans. This can create a positive infrastructure finance loop for banks. With the new platform serving as a reliable off-taker of such loans, banks would be incentivized to redeploy freed up capital to new Asian infrastructure projects.
AIIB is considering investing in a new platform business that will purchase infrastructure loans from financial institutions and distribute them to institutional investors through securitization or other formats. This will support private capital mobilization and builds infrastructure as an asset class. The purchase of such loans is predicated on the hypothesis that financial institutions that currently originate and hold such loans to maturity will increasingly be constrained from doing so with the advent of Basel lll regulations.
For more information about project financing, please review the project summary.
The Project involves the establishment of a platform to purchase infrastructure loans from financial institutions, structure and distribute them to institutional investors through securitization or other distribution formats. In line with previous capital markets projects executed by AIIB, this platform will develop and maintain an appropriate environmental, social, and governance (“ESG”) framework.
In place of AIIB’s Environmental and Social Policy (“ESP”), the project team proposes that the platform put in place a robust ESG framework that would be integrated with its due diligence process before any loan acquisition. The platform will also gradually develop environmentally and socially sustainable (“Sustainable”) securitizations or equivalent as a new asset class. The rationale for the proposed approach is as follow:
• The ESP is designed for lending to new projects and is not ‘fit for purpose’ for application to the capital markets or debt and equity security instruments;
• Loans will mostly be purchased in the secondary market, and the management of environmental and social risks is only feasible through rules based ESG framework governing the selection of loans and the underlying projects.
• Loans to be acquired would generally be backed by existing projects that have reached completion; in this context, the environmental and social risks are better managed through robust ESG criteria governing loan selection.
• A key objective of the Project is also to encourage banks, through robust ESG criteria, to originate sustainable infrastructure projects that are eligible for purchase by the platform.
• By taking an ESG framework approach, the platform can provide greater transparency to investors on the overall ESG profile of the underlying assets, thereby helping to add sustainability as a key and value-adding the feature of this emerging new asset class.
Principal Investment Officer, Capital Markets