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Innovative Loan-backed Securitization SPV Transforms Private Infrastructure Financing in Hong Kong

The need for infrastructure finance is growing rapidly. Hong Kong now has a model for domiciling the necessary structures that will open the market.

As the need for infrastructure funding in Asia grows, new models and structures are required. We recently had the opportunity to support development in the market when CSC helped establish the first Hong Kong-domiciled orphan special purpose vehicle (SPV) used in a public securitization transaction.

Acting as a corporate services provider, we worked with the Hong Kong Mortgage Corporation Limited (HKMC), the sponsor, the collateral manager and investor of the transaction, legal advisors, bookrunners and banks. Together, we established an SPV owned by a Hong Kong-based charitable trust, creating orphan ownership not affiliated with the sponsor.

This is considered an efficient and effective structure for a complex capital markets Infrastructure Loan-Backed Securitization (ILBS).

The project’s success is a significant moment for Hong Kong as a center for infrastructure funding in Asia. Hong Kong is a leading capital markets center but has previously had no history as a domicile for orphan securitization SPVs of this kind that are commonly utilized in other jurisdictions. This project blazed a trail for others to follow in the Hong Kong market.

The infrastructure financing gap

The need for infrastructure financing in Asia is growing rapidly. According to the World Economic Forum (WEF), China alone will require $22 trillion in green financing between now and 2060 when it expects to attain its carbon neutrality target as it transitions to a sustainable economy[1].

Figures for Asia as a whole are more difficult to come by, but experts suggest that upwards of $100 trillion[2] might be needed in the next few decades to decarbonize the continent. It will fall to private capital providers to meet much of that requirement.

For many low and middle-income countries, this financing is required for the infrastructure of daily life: water, sanitation, electricity grids, and road networks. Without it, basic human needs might not be met. In developed countries, financing is needed to replace existing infrastructure with cleaner, greener alternatives.

Infrastructure and project financing hold enormous potential and the downsides of failing to fund them could be catastrophic. If the world is to achieve its sustainability goals, capital markets must participate to help bridge the financing gap. To do that, they need entity structures that house, govern, and administer these complex investments in the most effective way.

Capital markets benefits for institutional investors and banks

The project we were involved in creates that supportive structure. Sponsored by a public sector client, this ILBS product gives investors access to a pool of approximately 35 loans related to infrastructure development and operation, with a tranche of notes dedicated to green financing.

By creating tradable instruments, asset diversification, and security, structures of this type may make infrastructure and project financing attractive to a deeper pool of investors. Infrastructure finance is an asset class that traditionally appeared on bank balance sheets. Now, it can offer investors the possibility of a steady income stream and instant diversification through easy access to a portfolio of seasoned assets.

The product we contributed to also complements the work of banks rather than competing with it. In fact, the underlying loans were originated by banks. Taking such loans off their balance sheets gives banks a financing exit, freeing them to lend more money to the real economy.

That’s an important benefit because the need for global infrastructure project financing is growing. Governments, banks, and capital markets along with corporate service providers all have a crucial role to play in plugging the gaps.

Developing Hong Kong as a center for capital markets

The orphan securitization SPV structure we helped establish in Hong Kong may prove to be a win-win for investors and banks. Additionally, it has established a precedent that may take Hong Kong to the next level as a capital market, created a template others may follow, and may make it easier to get similar deals off the ground in the future.

HKMC was publicly mandated to help develop the Hong Kong market. CSC, alongside other providers, cleared much of the undergrowth and created a path to domicile SPVs for infrastructure-backed loans in Hong Kong. Domiciling SPVs near to investors and the target infrastructure projects may allow for more effective governance.

There’s more work to be done, but a model was established that will work in the private sector too. CSC has vast global experience in SPV, trust, and agency administration in the securitization market and can facilitate these kinds of transactions in the smoothest possible way. We also support all manner of lenders with specialist loan agency, escrow, and security agent services.

By helping create a Hong Kong precedent, we hope we’ve lit the fuse. Hong Kong can now domicile the structures that may drive capital markets involvement in infrastructure development.

Why CSC?

  • CSC offers a global solution for SPV, trust and agency administration across capital markets transactions, subsidiary governance, and fund strategies, with tools to help clients navigate the ever-changing compliance and regulatory environment that they face.
  • With over 7,500 employees and capabilities in more than 140 jurisdictions, we do business wherever our clients are—and we accomplish that by employing experts in every business we serve.   

[1] WEF

[2] McKinsey