To start with issues of GMR, GVK, Reliance Power and Lanco, aggregating Rs 5,000 crore.
State-run India Infrastructure Finance Company Ltd (IIFCL) would soon launch a product to improve the creditworthiness of infrastructure companies seeking to raise money through long-term bonds. The new offering would be in association with the Asian Development Bank.
“We are expecting government approval for launching a credit enhancement product within the next 10 days,” IIFCL Chairman and Managing Director S K Goel said here.
IIFCL would launch the pilot by guaranting the bond issues of GMR, GVK, Reliance Power and Lanco, aggregating Rs 5,000 crore, he said on the sidelines of a meet on the debt market organised by rating agency Care last evening.
“IIFCL will act as a guarantor to the bonds issued by infrastructure companies. The risk involved in being a guarantor is the same as that in being a lender,” Goel said, adding that credit enhancement would be of great help to greenfield special purpose vehicles, which normally got minimum ratings.
A credit enhancement product aims to enhance the quality of long-term bonds issued by infrastructure companies, making them an attractive investment option. The product will see ratings of these companies go up by two notches, making them viable for investment by insurers and pension funds.
The guarantee is expected to help these companies improve their rating so that they can raise more funds. For instance, a B- bond may get a B+ rating after the issuer ties up with the state-run lender for this facility. Just as in a loan document, IIFCL will take charge of the fixed assets of the companies it guarantees.
Generally, banks are not too keen on funding large infrastructure projects as it blocks their money for a long time. Banks have been asking the Reserve Bank of India to allow them to lend to infrastructure projects under relaxed prudential norms. This product may help, especially as the government plans a hefty $1 trillion investment in infrastructure in the 12th Plan period and has admitted that unless alternative funding mechanisms are identified, banks alone will not be able to finance this investment.
On take-out finance, Goel said IIFCL had already taken 20 proposals worth Rs 3,200 crore — Rs 200 crore more than the year’s target.
Take-out finance refers to a financial institution taking over the credit from the original lender, and is applicable to long-term infra funding. Under this, the credit facility extended to the borrower is on the books of the original lender till it is taken over. The institution agreeing to take over has to reflect this obligation as a contingent liability in its books till it actually takes over with partial/full credit risk as agreed.
On the proposed Rs 1,200-crore tax-free infrastructure bonds issue, he said IIFCL would hit the market with an advertisement within three days. By January, the first tranche of Rs 400 crore will hit the streets. It would raise the remaining Rs 800 crore in February and March, he added.
In the last Budget, the finance minister had announced Section 80CCF, entitling taxpayers to an exemption on investment to the tune of Rs 20,000 a year in infrastructure bonds.
