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C. Shivkumar

Other covenants such as debt-equity ratio can be relaxed

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Bangalore Feb. 23

Banks and financial institutions have begun insisting on management continuity as a precondition for lending to infrastructure projects. Bankers said that the covenant implied that the original promoters would not be allowed to exit infrastructure projects during the debt service period.

This covenant was insisted on to ensure that project viability was not impacted during loan repayment period.

Lenders' insistence on this condition was largely due to the non-recourse nature of project financing. This implied that lenders' security would be confined to just project assets and cash flows.

Diluting Equity

However, bankers said, management continuity was not a "water tight condition." Promoters would be allowed to dilute their project equity holding during the loan repayment period if lenders were satisfied that debt service would not be adversely affected.

But some of the other covenants like debt-equity ratios would be relaxed. Already in the Mangalore Power project promoted jointly by the Lanco and the Nagarjuna Group, financiers have agreed to debt funding up to 80 per cent of the project cost. Even in the 4,000 MW ultra mega projects, Mundra and Sassan, where the Tata group and Lanco had emerged as the lowest bidders, similar debt equity ratios would be allowed to become the standard, the bankers indicated.

Debt Service

This relaxation in the debt-equity ratio was being permitted, since it did not allow the debt service coverage ratios (DSCR) to fall below the accepted standard of the 1.5 times the net revenues. The DSCR norms applicable to commercial funding is that net project cash flows would have to be at least 1.5 times the debt service payments. This ratio indicated the borrower's debt carrying capacity.

At current interest rates, of at least 10.25 per cent, power projects were in a position to support higher debt, assuming an average debt repayment period of 15 years, the bankers said. The low DSCRs were also largely due to the high component of foreign funding in these power projects. Foreign financiers are prepared to provide long-term funds to these projects at rates as low as LIBOR plus 150 basis points.

Loan Repayment

This was largely because both interest rate and exchange rate fluctuations were pass through components in power tariffs, and consequently would have no impact on the DSCRs. But even foreign financiers were insisting on management continuity during the loan repayment period, the bankers said.

Only in public sector promoted projects, DSCRs as low as 1.25 per cent were allowed. But this was largely because the projects had the support of sub-sovereign guarantees.

Even in such projects, financiers were unwilling to allow the State Governments to dilute their equity stakes below 51 per cent during the debt service period, the bankers said.

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