Debt funding in infrastructure - beginning to look up?
In the last 18 months, the acquisition of funding in India has proved quite difficult as banks having consistent experience with bad/unstable projects is causing them to be cautious. It’s not liquidity or available capital that is the problem, but more a lack of confidence in the sector, in the market, and in asset management.
Now, however, banks are moving towards a period of stability after taking on a large amount of non-performing assets in recent years. GRI Club Infra India members met last week in Gurugram to discuss debt funding in brownfield and greenfield projects, and how the promising airport sector as well as roads and power are beginning to see traction from investors and fund managers.
Acquiring funding has been much less of a problem for airport projects compared to other sectors - however there have been challenges that airports have faced with its tariff regulator. AERA, the airport tariff regulator, came into this industry at a later stage than most of the private airports. This created a cash flow mismatch on account of tariff for the airport operators, which created further problems with the banks who needed to complete quarterly/half yearly payments and meet other incremental loan covenants.
The Indian airport industry has been welcomed by the international bond market and companies have been able to access the debt marker as an alternative to Indian bank debt, and has provided much relief.
For roads, banks have been providing financing under the Hybrid Annuity Model (HAM), which have been financing good projects, including certain TOT road ones, for 15-18 years at a time. Out of 120 projects, 110 have already received financial closure, yet financiers can often find it difficult to fund these assets due to difficulty to predict tariff projections .
Some participants suggested that the government should capitalise the infrastructure debt funds to provide support to the developers to raise funds for the projects. The need here was to shift the political risk to central government, and banks would be ready to accept the construction risk while financing projects. Also, it was said that enough contractual security needed to exist in order to provide confidence to all stakeholders.
According to the present members however, the power sector had been facing much more pressing matters when it came to securing funding. The decreasing trend of tariff rates in the bids, for one, is increasing competition between developers and increasing pressure.
Along with other smaller obstacles, this is making projects unviable in terms of stability of cash flows and expected initial rates of return - reducing confidence in the renewable power sector for all parties.
The question was raised on whether or not the lending sector, which have huge exposure to the market and finance about 70% of the countries infrastructure, push lawmakers into making required changes to mitigate uncertainty.
But while India may want foreign pension funds to put their money in equity in India, Indian mutual funds and EPFO aren’t yet allowed to invest in debt of infra companies. It was stressed by attendees of the meeting that there was a need to allow both to invest in long term infra projects, since they have availability and access to long term funds.
GRI Members present at the club meeting intend on collectively producing a white paper following the initial discussions to present to relevant authorities and policy makers. Subscribe to GRI Hub’s newsletter to get first hand knowledge of this whitepaper and other relevant content.
At Infra India GRI 2020 infrastructure investors, developers, operators, holding companies and lenders will further discuss the trends in Indian infrastructure funding.
Article by Matt Harris