Bid to enable flow of insurance funds to infrastructure sector

The Asian Development Bank (ADB) has launched a $128-million facility to provide partial credit guarantee on rupee-denominated bonds issued by Indian companies to fund infrastructure projects.

Providing partial guarantee will boost the credit rating of an infrastructure project from BBB- or A to AA. It would lower the cost of borrowing for the special purpose vehicle (SPV).

This would also pave the way for cash-rich insurance and pension funds to buy bonds issued by the SPV, said Vivek Rao, Senior Finance Specialist, South Asia Department, ADB, from Manila.

According to the current norms, insurance and pension funds can be deployed only in instruments with a minimum AA credit rating. Through this new facility, ADB will take a part of the guarantee risk.

GMR to gain

To begin with, the Bank will provide partial credit guarantee alongside India Infrastructure Finance Company Ltd (IIFCL). ADB is open to partnering with other non-banking financial institutions for the same facility, said Rao.

The first company that is likely to benefit from this is a SPV of GMR Group. Indications are that the bonds would be floated by GMR Jadcherla Expressways.

“We expect the first transaction to be completed in the next two months,” said ADB officials.

ADB’s new facility will be open for a period of three years by when the amount allocated is expected to be fully utilised. India is the first country where the Bank is launching this facility.

“We believe India has the right conditions for launch of this product,” Rao said.

Most of the funds earmarked for this facility are likely to be used towards NHAI-road projects and power projects, said Siddartha Shah, Senior Investment Specialist, Private Sector Operations Department, ADB, Manila.

(This article was published in the Business Line print edition dated September 23, 2012)
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