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Indian developers flock to project bonds to fund infrastructure

According to reports, at least a dozen Indian infrastructure developers are turning to the local bond market to cut funding costs, in an early sign that institutional investors are warming to project financings.

Infrastructure-related bonds in the works include a long-awaited debut under an Asian Development Bank-backed credit-enhancement scheme, as well as several long-term deals with innovative structures.

A flurry of successful refinancings will raise hopes that India’s underdeveloped capital markets can help ease the country’s infrastructure bottlenecks by offering an alternative to the capital-constrained banking sector.

“Infrastructure companies are keen to expand their investor bases and, if this brings cost savings, they are even willing to attempt new structures,” said a mutual fund investor. “These efforts are deepening the bond markets as many lower-rated issuers are able to raise funds.”

In the past, India’s bond market offered little assistance to infrastructure developers as investors had limited appetite for long tenors and were barred from investing in lower-rated instruments.

However, that is changing as yields fall, with infrastructure companies hoping that novel structures will allow them to strike the sweet spot on ratings and attract institutional investors at interest rates as much as 100bp inside the cost of bank debt.

For instance, private sector wind-power firm ReNew Power Ventures plans to issue a 4 billion rupee ($63 million) 10-year bond to yield around 10.25 per cent, a lot less than the interest of around 11.50 per cent it pays on its existing loans.

The bonds, to be issued in the name of wholly owned subsidiary Renew Wind Energy (Jath), are expected to come with credit enhancement covering 35 per cent of the deal from a joint venture between state-owned India Infrastructure Finance (IIFCL) and the ADB.

That support will bump up the ratings on the bonds to Double A, a level more palatable to investors like insurance companies, pension funds and provident funds. On a standalone basis, the subsidiary has a local rating of BBB-.

The offering, with HSBC as likely lead, may also feature staggered redemptions to appeal further to institutional investors.

According to buy-side sources, at least half a dozen more deals are in the pipeline using this partial guarantee structure.

“Everyone is waiting for ReNew Power to cross the finishing line,” said one source.

Goldman Sachs owns a majority stake in ReNew. The deal is already 50per cent covered and may be completed this month. It will be the first since IIFCL and the ADB announced plans in 2012 to support rupee issues from infrastructure companies. New structures

Other developers are looking to target mutual funds, which typically prefer shorter tenors. Pune-Solapur Expressways, a 50:50 joint venture project of Italy’s Atlantia and TRIL Roads (part of Tata Realty and Infrastructure), is splitting its 10 billion rupee refinancing into a 8 billion rupee base rate-linked bond and a 2 billion rupee loan, both with door-to-door maturity of 14 years.

The fixed-rate bonds will be priced at a spread over the base rate of a lender, subject to annual resets. Investors will have the option to quote a new spread each year, while the issuer can choose to accept the new terms or redeem the bonds.

The structure offers additional flexibility to both the issuer and investors in fixing market-linked pricing. Kotak Mahindra Bank is arranging the offering, which is rated Single A locally.

Construction firm Shapoorji Pallonji also plans to raise 27 billion rupees through a 15-year amortising bond backed by annuity payments from a road project.

Proceeds of the offering will partially repay local debt and a $350 million project finance loan that Standard Chartered arranged in July 2011.

At least three other bond offerings from companies in the road sector are being premarketed, according to sources.

Issuing bonds will allow infrastructure developers to access an alternative investor base, reducing their reliance on India’s public sector banks and freeing up lenders to support new projects.

Market participants expect institutional investors, such as pension funds and insurance companies, to accept lower rates for long-term infrastructure assets with established track records of stable cash flows.

Also, with the base rate of most Indian lenders still at around 10per cent on an annualised basis, many developers find pricing in the bond markets more attractive.

Bankers, however, warn that pricing expectations are not always aligned.

“Bond markets are offering a great opportunity to issuers on structures and pricing, but the only problem is, with the ratings, the price expectations of the issuers also move up substantially,” said a Mumbai-based fixed-income investor.

“By suddenly moving to the Double A rating band, the issuers feel they need to pay much less, but that is not what investors think,” he added.

Mismatches in price expectations between issuers and investors, as well as changing market conditions, have already derailed two previous credit-enhanced bond offerings planned under the IIFCL-ADB wrap.

GMR Jadcherla Expressways and L&T Vadodara Bharuch Tollway each cancelled plans to sell bonds in 2013.

However, market participants now say some infrastructure companies have come round to the idea of leaving 25bp to 30bp on the table for investors.

Earlier, Shapoorji Pallonji was aiming to pay 9per cent on its annuity-backed road offering, but it might end up paying 50bp more as the Indian currency has fallen 2 rupees against the dollar, while bond yields have moved up around 20bp.

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