India Infrastructure Finance Company Ltd (IIFCL) has announced the issuance of India’s first ‘credit enhanced’ infrastructure bond — issued by Renew Wind Energy (Jath) Ltd for ₹451 crore — partially guaranteed by the Infrastructure Finance Company and counter-guaranteed by the Asian Development Bank.
Through credit enhancement, the lender is provided with reassurance that the borrower will honour the obligation through additional collateral, insurance, or a third party guarantee.
“This issue will open up the bonds markets to infrastructure projects and will lead to development of the Indian debt capital market. It will enable channelisation of long-term funds from investors like insurance companies and pension funds into the infrastructure sector,” SB Nayar, CMD of IIFCL, said while announcing the bond issuance on Wednesday.
IDFC Ltd is the sole arranger and underwriter to these bonds that have a tenor of 18 years. The rating of this bond has been enhanced based on partial credit guarantee by IIFCL under its ‘credit enhancement scheme’, with a counter-guarantee up to 50 per cent from the ADB. This has enhanced the rating of the bond to AA+ (SO).
Investors generally prefer such high rated bonds, while most infrastructure projects are generally rated BBB or A, without credit enhancement, IIFCL pointed out.
There are fourteen more such transactions worth an estimated ₹6,000 crore in the pipeline and IIFCL hopes to have at least six issuances of credit-enhanced bonds by the end of the fiscal.
Advantages The estimated ₹6,000-crore transactions include credit enhanced bonds by the clean energy arm of Hindustan Power, which was also announced on Wednesday. The company has issued partially guaranteed debentures worth ₹380 crore fully underwritten by YES Bank Limited.
The bonds not only offer greater access to long-term funds for infrastructure projects, which would need an estimated $1 trillion of investment over the next decade, but also offer a cheaper source of finance.
“It is cheaper in excess of 150 basis points,” said Sumant Sinha from Renew Wind Energy.
In India, infrastructure debt funding is being primarily done by the banking sector, whereas worldwide, debt capital markets are the major source of such financing, Nayar pointed out.
“However, constraints on the banking sector like asset liability mismatch, exposure constraints and increased capital requirement under Basel III norms, would restrict their funding of infrastructure projects. It is, therefore, essential that infrastructure projects are able to raise funds through alternative means and tap capital markets,” Nayar said.