Collateralised Loan Obligation (CLO)
Context
- Asia long faced a gap of investment capital available for infrastructure projects
- In 2015, Singapore’s government announced its intention to relieve these concerns and promote debt financing as a viable option for potential infrastructure investors
Problem
- Asian institutional investors had been slow to invest in infrastructure debt financing as they had limited access to long-term debt financing from commercial banks
- The government had to therefore create a vehicle that could recycle lending capacity by removing loans off commercial banks’ balance sheets
Innovation
- Singapore-based Clifford Capital offered three classes of investment grade, US dollar- denominated notes to institutional investors, listed on the Singapore Exchange.
- By taking on a subordinated 10% first-loss piece of the capital structure, Clifford showed investors that it had some “skin in the game,” boosting confidence in the securities
- The vehicle achieved its objective by increasing lending capacity by banks
Stakeholders Involved
- Clifford Capital – Sponsored and managed Bayfront Infra-Capital
- Bayfront Infra Capital – SPV set up as the collateralized loan obligation (CLO) issuer
- Citigroup, Standard Chartered, DBS, HSBC, SMBC – Managed the transaction as joint-book runners
- MAS – Regulator of investment products
Results/Impact
- Launched Asia's first infrastructure project finance securitisation successfully, with an issue size of USD 458M
- Offering was met with strong demand from institutional investors, including insurers, asset managers, pension funds and endowment funds
- Catalysed interest from institutional investors and facilitated investments in long term infrastructure debt instruments
- Enhanced banks' ability to originate, arrange and provide infrastructure project financing within
the region
Key lessons learnt
- Clifford Capital carefully mitigated the level of risk of its notes by securitizing loans on projects that were already operational or close to completion; this was critical to ensure investors felt they were not taking on too much risk
- Firms considering similar financing mechanisms should be willing to assume some of the risk themselves, as Clifford Capital did, to further raise investor confidence
- Clifford denominated its notes in US dollars and tied its interest rate to LIBOR; denominating securities in a commonly-used currency and tying interest rates to a well-known benchmark can help mitigate currency or interest-rate risk created by the difference between the securitized notes and the underlying loans