Institutional leg-up for core sector funding

Infrastructure funding is getting a leg-up due to credit enhancements achieved through institutional guarantees.

As a result, over Rs 3,000 crore funding for infrastructure projects is set to be raised during this financial year alone through this mechanism.

Earlier in July, Tata Tele Services raised Rs 970 crore for rolling out its telecom services across the country. With 60 per cent of the amount guaranteed by Tata Sons (30 per cent) and Barclays Bank (30 per cent), the Tata Tele issue got phenomenal response from the market.

The 7-year paper with a coupon rate of 6.9 per cent managed to mobilise Rs 1,500 crore from over 12 investors across the board.

"The issue got a double A-rating from Icra based on 60 per cent of the repayment of the issue guaranteed by triple A-rated entities," said Raju Shukla, managing director debt capital markets/investment banking, Barclays Capital Asia Ltd.

Tata Tele is not the only issue. About a couple of months back, Tata Power raised about Rs 600 crore through this means for a 10-year paper.

Similarly Jaiprakash Industries proposes to raise Rs 400-odd crore shortly with a partial guarantee from ICICI Bank. Finolex Industries has also gone for a Rs 75-crore issue to raise funds for infrastructure project.

"Discussions are on with 7 companies which want to raise funds in a similar fashion, as this enables them to mop up large amounts on the back of institutional guarantees," said Shukla.

Jindal Steel proposes to raise about Rs 500-1,000 crore on the back of institutional guarantees, he added.

The credit enhancement on the back of guarantees do not come cheap.

Guarantors like banks and parent bodies are earning about 1.5-2 per cent in fees for the amount guaranteed.

Many banks are keen to pick up these fees over and above the underwriting commission of 0.25-0.5 per cent of the amount being raised.

After a while, once the corporate entity's rating on a stand alone basis rising to double A, it no longer needs to pay the guarantor the fee, said Shukla. "This happens with improvement in cash flows as an infrastructure project gets implemented," he added.