PM Modi gives weaker road builders a path to sell more bonds in FY18

Modi's govt is seeking greater participation from private companies in expanding the nation's road network

Indian Prime Minister Narendra Modi has big plans for road building, and part of it includes giving weaker infrastructure contractors greater access to the local bond market.

Finance Minister Arun Jaitley’s proposal to lower the investment threshold on rupee bond purchases for investors including pension funds to A from AA is set to benefit local highway developers such as Dilip Buildcon Ltd. and Sadbhav Infrastructure Project Ltd. About 20 percent of road builders with outstanding rupee bonds have single-A ratings, according to data compiled by Bloomberg.

“The measure will open up a new source of funding for road construction companies, which are right now dependent on bank loans,” Varun Mehta, chief financial officer at Sadbhav Infrastructure said in a phone interview. “It shifts funding to more sophisticated investors such as pension funds and insurance companies. It will also instil more financial discipline among companies.”

Modi’s government is seeking greater participation from private companies in expanding the nation’s road network, a key government initiative to boost growth. Bonds from road builders may be attractive to insurers and pension funds because of their longer maturities, and offer contractors potentially lower financing costs than bank loans, according to Rajesh Mokashi, managing director at ratings firm CARE. 

“There is a huge opportunity for road project funding from the bond markets,” said Mokashi in an interview. “If road projects are structured correctly, there will be enough takers for their bonds.”

The government unveiled plans last October to spend about $108 billion over five years to build almost 84,000 kilometers of roads -- that’s more than twice the globe’s circumference -- and it is targeting private investments for about 15 percent of the funds. Road companies may sell a record 340 billion rupees ($5.32 billion) of bonds this financial year to March 2018, surpassing 330 billion rupees for the previous period, estimates from ratings firm ICRA show.

“At a time when a lot of road construction companies are finding it difficult to get loans from banks saddled with bad loans, the rating relaxation provides better access to the corporate bond market,” according to Rohan Suryavanshi, head strategy and planning at Dilip Buildcon. “We will continue to look at this market for our fund requirements.”