Agency's Additional Credit Enhancement Facility To Help Cos Attract More Funding
BONDS issued by India's infrastructure companies could soon get an additional credit enhancement facility from the multilateral agency Asian Development Bank (ADB), allowing them to get a high rating and thereby attract investments from insurance and retirement funds. The proposal being considered by the finance ministry has mooted that the ADB could reinsure the bonds from infrastructure companies that are already guaranteed by IIFCL, the dedicated infrastructure finance institution set up by the government.
"With ADB coming in as a re-insurer of these bonds, both institutions and individuals will have that extra guarantee that their investments are fully secure and make them a better investment proposition," said an official. IIFCL has decided to provide credit enhancement facility to private bonds worth Rs 5000 crore every year through a guarantee mechanism. Together with the reinsurance support from ADB, the IIFCL guarantee will lift the bond rating of a private issuer to level where insurance companies can invest in them.
The current rules allow insurance companies to invest only in AAA or AA credit-rated debt paper. Moreover, at least 75% of investment in debt instruments for every fund in the case of life insurers and investment assets of general insurers should have an AAA rating. Very few bond issuers would manage these ratings on their own steam. "It's a double benefit. Since most of these companies would be raising money through loans at an interest rate around 10-12%, through bonds the same amount can be generated at 8-8.5%," he said, adding that this would further help to develop the bond market in India.
IIFCL will only be guaranteeing long-term bonds with 10 or 15 years of maturity and only those companies which have a minimum 'BB' rating.
"This move of IIFCL was much needed in the market since access to long-term sources of the fund was restricted. This will help insurance companies and pension funds to explore the nascent infrastructure bond market," said Arvind Mahajan, executive director KPMG.
IIFCL is already in talks with several infrastructure firms but the official refused to divulge details saying that the discussions are at a preliminary stage. "The real operation will kick-start from next financial year. As of now, we are working on the model," he said. Under the proposed model, IIFCL will take 50% of the savings that infrastructure companies will make from the lower interest rates they will get on the strength of the guarantee.
"This will be a huge amount since the project period is for at least 10-15 years," he said. IIFCL will share a portion of this with ADB for the liability cover. The Planning Commission has estimated that infrastructure sector will need an investment of about $500 billion in the Eleventh Plan (2007-12) and over $1000 billion in 12th Plan. This means billions of dollars will need to be raised for sustaining growth in the infrastructure sector.
