First bond issue under guarantee facility can be a boon for Indian infrastructure

Published on Wednesday, 23 September 2015

Published by Donald Lambert and Siddhartha Shah on Wednesday, 23 September 2015

A worker helping construct a port in India.
A worker helping construct a port in India.

Since he assumed power over a year ago, Indian Prime Minister Narendra Modi has struggled to find pockets big enough to pay for India’s ambitious plan of channeling $1 trillion into badly needed new airports, roads, power plants and other infrastructure by mid-2017. There is no getting around the fact that at least three-quarters of that total needs to be financed through debt.There is now some good news out there on that front. ADB and the India Infrastructure Finance Company Ltd. (IIFCL) have jointly guaranteed a Rs4.51 billion ($68 million) project bond for ReNew Power Ventures Private Ltd., a New Delhi-based independent power producer. The bond, which will refinance bank loans taken to fund a wind power plant in western India, is the first issue under a Rs7.2 billion ($128 million) project bond guarantee facility set up in 2012 by ADB and IIFCL to draw more institutional investors into critical infrastructure projects in India.In many ways, this is a landmark achievement, as credit enhancement is the crucial missing link that will allow institutional investors to invest in these bonds. It should also pave the way for others. Guarantees on up to three more project bonds are expected under the program by the end of the year, which, in turn, should help familiarize market players with both credit guarantees and project bonds, as well as encourage others to tap the market in a similar way.Currently, banks provide most of the funding for infrastructure projects in India, but the demands of the sector have far exceeded banks’ credit limits. Bond financing, on the other hand, has not yet taken off because infrastructure bonds are typically rated too low for institutional investors, which—because of India’s relatively high savings rate—have huge amounts of funds to invest. For instance, insurance companies have an estimated $300 billion of cash available to invest, while pension funds can invest up to $30 billion. The long-term investments that infrastructure companies require are also the best match for insurance and pension liabilities.Under the guarantee facility, IIFCL provides partial guarantees on rupee-denominated bonds issued by Indian companies to finance infrastructure projects. ADB then takes on a part of IIFCL’s guarantee risk. Together, the partial credit guarantees boost the credit rating of a typical infrastructure project from ratings as low as BBB to at least AA, making the bonds attractive to institutional investors. Replacing bank debt with bonds will then allow banks more room to provide loans to other infrastructure projects and businesses, and eventually international investors will start buying Indian bonds.For Renew’s project bond, IIFCL is guaranteeing a maximum of 28% of the bond, with ADB counter-guaranteeing half of that. The guarantee raises the credit rating of the bond to AA+. For its part, ReNew will use the “green bond” to pre-pay the bank loans taken to finance an 85-megawatt wind project in Jath, Maharashtra.In short, the credit-wrapped project bond is a win-win-win for all parties: the issuer gets long-term, fixed-rate financing that represents a savings over its current bank loans; investors gain access to a highly-rated instrument that offers a better return than government securities with minimal additional risks; and banks can recycle their capital for new infrastructure loans, refreshing and reassessing their loan portfolios.The bonds will mature in March 2033.