State-owned infrastructure lender IIFCL plans to set up a $500-million fund to support credit guarantees provided by it for project bonds of infrastructure providers.

This fund will back the guarantees provided by IIFCL as part of the credit enhancement scheme, S.K.Goel, Chairman and Managing Director, IIFCL, told Business Line here. The lender does not want to be in a situation where the guarantees are not backed or supported by any fund, he said.

In case guarantees are invoked, then IIFCL could dip into the newly set up fund for support.

Of the $500 million (Rs 2,750 crore) fund size, about Rs 1,000 crore may be contributed by IIFCL and the rest could come from domestic and foreign investors.

IIFCL had, in mid-January, signed the guarantee agreement for the first pilot under its much talked about credit enhancement scheme.

While IIFCL provided partial credit guarantee to the bond-offering of GMR Jadcherla, Asian Development Bank extended backstop guarantee by sharing risks with IIFCL.

With the Asian Development Bank unlikely to continue providing backstop guarantee beyond few pilot projects, it is now being felt that IIFCL should put in place a separate fund to back its guarantees.

Through credit enhancement, a lender is provided with reassurance that a borrower will honour the obligation through additional collateral or third party guarantee. It reduces credit/default risk of a debt, thereby enhancing credit rating and lowering the interest rates on the debt.

MOU with PFC

Goel said IIFCL would soon enter into a memorandum of understanding with Power Finance Corporation (PFC) for providing credit enhancement of project bonds issued by power sector companies.

Under the MoU, PFC will take 50 per cent of the guarantees and the rest of the guarantee will be given by IIFCL, he said.

IIFCL is also looking to attract investments from Abu Dhabi Investment Authority, a sovereign wealth fund of Abu Dhabi, for the infrastructure development fund being promoted by the Indian State-owned infrastructure lender.

(This article was published on February 19, 2013)
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