SUERO ANTIOFIDICO
QUÉ MAS DEBO SABER ACERCA DE LAS MORDEDURAS DE SERPIENTE?
Presently the tenure of infrastructure loans is nearly half of the concession period. The short tenure is possibly given by the banks to give them enough time for restructuring the infrastructure asset in the event that something goes wrong with the project. While in International Market it is around 80%.
The significant issue with debt financing in India is that in addition to short tenure banks also ask for short resets and high Average Debt Service Cover Ratio (DSCR) from promoters.
The reset period for some of the recent projects have become yearly. Yearly reset periods are a way of passing the entire interest rate risk to the project. However, surprisingly many developers actually preferred shorter resets. This is because the experience in India has been one of falling interest rates and projects being refinanced at a lower rate. Having said this only seldom one can see there an increase in interest rates because of the reset clause. The possible reason for this phenomenon is that in general the interest rates have been falling over the years of the survey and also that banks generally perceive a lower risk when the project construction period is over.
Post construction, when the majority of the risks have been covered, the developers frequently renegotiate the loan terms with the commercial banks to more favorable terms.
However, in the present system renegotiations have to be carried out for individual projects which can be both time consuming and expensive. There is no availability of institutions which actively seek projects to take up on their own
A bigger cause of worry for lending by banks is that RBI exposure norms may constraint the lending to some developers by banks. RBI classifies infrastructure financing to SPV’s in India as forming part of the group exposure of the parent company. Beyond a certain point banks are not allowed to take further exposure to these companies. In the current situation large companies with varied interests are likely to hit the group exposure norms in the next 2-3 years preventing banks from lending to them. Institutions such as the IIFCL have been actively lobbying the RBI and Finance Ministry to do away with the group exposure norms for infrastructure. However, till now the RBI has stuck to not making any changes to the group exposure norms. But if no changes are made then companies will be forced to look at additional means of financing the debt component of the projects. This situation might become a driver for change in the project finance market as existing commercial banks will be forced slow down the growth in lending to the infrastructure sector.
Next section will deal with trends and issues with Equity financing in India.
9.1.2
Equity Financing
One key issue- the amount of equity required to attract large volume of debt in the infrastructure sector is not available. The lack of adequate amounts of risk capital is leading promoters of large infrastructure projects to push for ever higher leverage from commercial banks. The commercial banks on their part have largely acquiesced to their demands realizing that reaching financial closure would be difficult otherwise.
If we look at the numbers we find that Senior Debt to Pure Equity Ratio (DER) over the years for all sectors has increased.
The maximum equity has been brought in Roads & Bridges which is due to the large number of projects being awarded on PPP basis in the last 3-4 years. As can
also be seen from the accompanying graphic nearly 80 percent of this equity at the SPV level is infused by the promoter’s themselves. This is because due to the lack of exit options at the SPV level, lock-in etc. very few equity providers are willing to participate at SPV level.
One major reason for the predominance of equity infusion by developers is that currently there are several restrictions on equity investments. The way rules are structured in India makes taking out of the equity by the developers very expensive. This issue is discussed in detail later in the report.
The ability of a developer to reduce their equity in the project is important so that it can recycle the equity into other projects. Equity can be shared at the beginning of the project or it can be sold off later in the project. However, in India many concession agreements do not allow the developer to sell off their equity in the project. Internationally it is common for financial investors to take over the project once the construction phase is over. This is because once the construction risk is over financial institutions are more adept at increasing the returns on the project equity as compared to a developer. The financial investor in turn hires a contractor/s to provide for O&M. In the Indian situation this can especially work as no developer really has the experience to claim that they adept at operating the assets in comparison to some one else. While some movement has been seen in this direction, with the new NHAI agreements allowing for more selling down of the equity, many concession agreements still do not even provide for such a possibility. We have not seen financial investors become a part of the bidding consortium. However, the situation is slowly changing with IDFC, SREI and Macquarie showing some interest in infrastructure projects in India in recent times. Despite these restrictions data clearly shows that developers have been able to reduce the level of own equity invested in projects.
A sector wise analysis shows that equity funding by developers has been supplemented by Government equity as well as sub debt in Airports & Railways projects while developer’s equity has been supplemented primarily by sub debt in the Roads & Bridges projects. As can be seen, sub debt has emerged as the primary means by which developers reduce their equity infusion.
It may also be noted that there has been an increasing trend in sub-debt since the Year 2004. Also, it is important to mention that majority of sub-debt (86%) has come in Road & Bridges PPP projects which is a matured and more active sector now in terms of PPP initiative.
Also against the popular perception, sub-debt is not limited to annuity projects in Roads & Bridges sector and only about 7% of projects having sub-debt are annuity projects.
Analysis of the data shows that most of the sub-debt has been provided by the senior lenders themselves. This clearly means that sub debt is not really considered as quasi equity, providing the lenders with the requisite amount of risk capital, but more as a way to assist developers in putting less equity in the projects. In return for ‘conserving’ the equity of the developers banks charge a higher rate of interest on the sub debt thereby improving the overall yield on the project debt.
9.1.3 Summary of Major Issues on the Debt and Equity Side
We find that on the debt side the major lenders are commercial banks. Going forward relying on commercial banks as major lenders is precarious as banks are likely to be constrained in their future lending due to the issue of asset liability mismatch. Also banks have not been able to offer very long tenure loans and the reset period on these loans is very short. Finally the exposure norms may prevent banks from lending to large developers in India thereby stymieing the growth of PPP infrastructure in India.
On the equity side we find that promoter’s of PPP infrastructure projects have to put in most of the equity requirement of an infrastructure project. There is an acute shortage of equity with private developers and if the present trend continues then they will not be able to attract the requisite amount of debt for the projects. Use of sub debt has eased the equity requirement somewhat. However, restrictions on taking out of the equity by developers remain a cause for concern. Involvement of financial investors in bidding for infrastructure projects is also limited at present as is the involvement of strategic investors and international companies,
9.2 Changes Required to Reduce and Ease the Identified
Constraints
As discussed in the previous section, from a financing point of view there are several changes required to help ease the requirements of the infrastructure sector in the long run. Many of these issues are already recognized by the GoI and in particular the Ministry of Finance. It is important to understand that these changes, even if forthcoming, will not yield dramatic results. It is highly unlikely that the requirement of USD 320 billion will be financed if the constraints are removed as results of many of these changes will only be seen in their full force in the long run. That is why the changes required should be viewed at as forward looking activities which need to be rolled out to streamline the financing requirement in the future.
Changes are required both on the debt side and the equity side. On the debt side new sources of funds need to be developed to reduce the reliance of infrastructure financing on commercial bank lending. Also to continue the momentum of bank financing of infrastructure changes need to take place so that banks do not concentrate risks from long term lending.
On the equity side as well new sources of equity need to be explored to ease the scarcity being faced by excessive reliance on promoter’s equity.
It is important to keep in mind that changes required should not be such that they compromise on risk assessment of projects or give out bad loans. India already has had experience with such lending by development finance institutions to the corporate sector. These institutions where saddled with large amounts of bad loans and fiscal imperatives post the reform in 90’s led to a fading away of many such institutions. Thus while infrastructure development is critical we assume that the Government will not take it up at the cost of prudence.