Thursday, 18 July 2019

Joint venture to boost infrastructure bonds

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The Asian Development Bank last September pledged to guarantee a portion of up to five Indian project financings in a US$128m bid to kick-start the country’s infrastructure bond market.

Alongside state-run India Infrastructure Finance (IIFCL), it will guarantee repayment of 24% of a 12.5-year bond of up to Rs3.2bn (US$59m) from a toll-road project in Andhra Pradesh.

The move is the first of its kind in the rupee-bond market and comes as India steps up efforts to spread its infrastructure funding requirement beyond the banking sector.

“The main objective of our facility is to help stimulate the project finance market in India by leveraging our balance sheet to support project bonds in the infrastructure sector that new investors, such as pension funds and insurance companies, can be attracted to,” said Phillip Erquiaga, director general of ADB’s private sector operations department, at that time.

The ADB has committed US$128m to the guarantee facility, formally called the facility for credit enhancement of project bonds in India, and plans to support five infrastructure bonds over the next three years.

The first deal will refinance an existing rupee loan that funded the upgrading of the Farukhnagar-Jadcherla highway, of which GMR Jadcherla Expressways is the sponsor. The ADB and IIFCL together are providing an unconditional first-loss default guarantee to cover 24% of the principal.

The partial guarantee has bumped up Icra’s rating of the bonds to AA from A, boosting GMR’s chances of attracting insurance companies and pension funds to the financing and freeing up new lines for its lending banks.

Ratings key

India’s bond market has offered little assistance to infrastructure developers in the past, as the limited investor base for long tenors is often barred from investing in lower-rated instruments.

The bond issue has yet to materialise due to a change of control following GMR’s sale of a 74% stake in the project to infrastructure funds that a joint venture between State Bank of India and Macquarie manages.

The deal, however, remains on track and market participants believe local funds will be receptive to the idea.

 “The market is there for the IIFCL initiative. It has good intentions, but there’s been no progress now for almost a year,” said Rakesh Garg, head of financing for India at Barclays.

“India is working on many debt investment initiatives, such as bigger limits for foreign investors, and lower taxes, but the issues still require high ratings. It’s a sign of confidence; without credit enhancement or guarantees, investors aren’t keen to take risk in the debt capital markets.”

GMR’s credit-wrapped bonds are expected to be placed to three investors. For the remaining four project bond sales, the ADB, along with IIFCL or other financiers, will provide partial guarantees.

Those four commitments will come in the transport and hydropower sectors. The developer of an airport project in South India is among the borrowers looking at credit-enhanced bonds to replace its outstanding debt, according to sources.

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