How project finance fits into a trade finance strategy

Why is project finance part of your Trade Finance Strategy?

We view project finance as being complementary to trade finance. Trade finance is essential for supporting and facilitating trade by financing the physical movement of goods between producer and buyer, whereas project finance supports the creation and development of critical infrastructure that facilitates the production or movement of these goods. We focus on essential goods and these infrastructure assets are vital to the supply chain and drive economic growth such as ports, terminals, LNG export terminals and power generation facilities. By incorporating project finance into our trade finance strategy, we enhance diversification and leverage off the interconnector relationship while capturing positive trends around economic development. These trends can include global trade growth, supply chain security, energy security and energy transition.

What are the advantages of investing in project finance?

Investing in project finance gives you unique access to the resilient nature of infrastructure assets operating in critical sectors such as energy, transportation, utilities and digital. Infrastructure assets have a number of attractive characteristics, such as high barriers to entry and a proven track record of operating through economic cycles. They generate stable and visible cash flows backed by long-term contracts. Their revenues are inflation linked with the underlying contracts having inflation escalators. They generate high operating margins and have predictable and low maintenance costs. In addition, project finance loans are highly structured – they are secured over real assets and over collateralisation of the loan, debt sizing is very conservative and based off contractual cash flows, there is mandatory interest rate hedging and the legal documentation is very strong with the inclusion of robust covenants. In our opinion, given the features of project finance, they can achieve attractive risk-adjusted returns while managing downside risk effectively.

How does our approach allow the Strategy to differentiate from peers?

Our key differentiator is diversification. It’s a global mandate and is sector agnostic. Unlike our peers we don’t just focus solely on one part of trade finance. We invest in trade finance loans to different borrower types across diverse trade finance, loan structures. Ultimately, by incorporating project finance into our trade finance strategy, we’re adding another layer of diversification. We’re combining two very defensive asset classes, which have proven track records of performing through economic cycles. Our approach is to source these loans from the banks and take non-concentrated positions. We focus on shorter tenure project finance loans and combine this with the trade finance loans, which ensures that the strategy remains a shorter duration offering. This level of integration sets us apart from peers. It enhances diversification and gives investors the opportunity to earn attractive risk-adjusted returns and capture positive trends in infrastructure and trade across emerging markets and developed markets.

Can you share an example of a project that the strategy invested in?

In 2020, we invested in a project finance loan to a US LNG export terminal. At the time of our investment, our key investment thesis was around LNG being an essential transition fuel. Since then, we’ve captured other positive tailwinds around energy security, with Europe weaning themselves on Russian gas and demanding more US LNG and the broader electrification trend. As a result, this investment has performed exceptionally well and has generated attractive adjusted returns for our trade finance strategy.