Infrastructure to see consolidation with RBI ordinance

Infrastructure, one of the most financially stressed sectors, is expected to see a spurt in consolidation with the Reserve Bank of India (RBI) being given additional powers to deal with non-performing assets.
 
Infrastructure and iron and steel are the two sectors with the maximum amount of stressed assets. With the RBI playing a more active role, industry experts and officials expect deals that were stuck because of valuation issues will gather momentum.
 
“Mergers and acquisitions will surely start improving. Half-finished and close to completion projects will move forward with new buyers coming in. Deals will now happen at the current valuation and not on the basis of the original project cost,” said Harish HV, Partner, India Leadership Team, Grant Thornton India LLP. Infrastructure bankers agree the past one to two years have seen a couple of deals that did not reach conclusion as either the lender or the promoter was unwilling to take a haircut.
 
AM Naik, group executive chairman, L&T, agrees there would be more assets for sale, but points out the industry lacks enough buyers for these assets. “The point is that there are not enough buyers. Most infrastructure companies are not in a strong position, so who will consolidate? For instance, L&T will not consolidate,” he said, adding the true price of assets needs to show up for buyers, including private firms and foreign companies, to show interest in these assets.
 
According to an ICRA report published in April, 31 per cent of the deals in the road sector in the past two years were made at a loss to the investor. Shubham Jain, vice-president and sector head, Corporate Ratings for ICRA, expects financial investors to buy such assets. “Many international financial investors including pension funds are positive on India as reflected by a series of recent M&A deals. These institutions also have deep pockets as well as a long-term investment horizon to take a large exposure in the infrastructure sector,” Jain said.
 
Not just deals, industry experts also expect the sector to gain from an improvement in sentiment in the long term. At present, lenders remain wary of lending to infrastructure projects after having burnt their fingers in the past. Krishnan Sitaraman, senior director with CRISIL, points out as the recovery environment improves, there could be some optimism, providing lenders more comfort and confidence to lend to good infrastructure projects.

 
In a bid to reduce stressed assets in the infrastructure sector, lenders in the past two years have initiated strategic debt restructuring (SDR), the scheme for sustainable structuring of stressed assets, and an option to refinance debt under the 5/25 refinancing policy (the 5/25 scheme allows banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years). While most of these proceedings give companies a relative window period to improve financial performance, experts add the ordinance on the RBI would help build the right pressure on such accounts.
 
“There are no clear guidelines so far; however, bankers will keep a close look on the progress of these proceedings in terms of cash flow improvements and other financial parameters,” Sitaraman said. Infrastructure groups like Jaypee and GMR Infrastructure have some of their subsidiaries under the SDR scheme.
 
A couple of others like Adani Power and Jindal Steel and Power have availed themselves of a longer tenure for their loans through 5/25 refinancing.