Manila/New Delhi: The Asian Development Bank (ADB) has approved a facility
that may kickstart the Indian infrastructure bond market and ultimately channel
substantial amounts of domestic and international pension and insurance funds
into critically needed energy, railways, roads, water, and other infrastructure
and utilities. The guarantee facility, a first for India, will also help make
India’s bond market deeper and more vibrant, benefitting investors and
borrowers.
“Mobilizing
additional funds is essential if India is to meet its enormous infrastructure
financing needs. Plus, it’s important to prevent over-reliance on bank
financing and to ensure that capital markets play a financing and risk
mitigation role,” said Vivek Rao, Senior Finance Specialist in ADB’s South Asia
Department.
Poor infrastructure
slashes 2 percentage points off India’s economic growth every year, according
to the government. India aims to invest $1 trillion in infrastructure over
2012-17 of which some $350 billion is expected to come in the shape of private
sector debt. Currently, banks provide the vast majority of infrastructure
loans, but are now reaching their lending limits. Infrastructure bonds,
meanwhile, have not been used, despite an enormous pool of savings which need a
long term home with strong and stable returns.
Under this
first-of-a-kind $128 million (Rs7.168 billion) facility, developed with India
Infrastructure Finance Company Limited (IIFCL), ADB and domestic finance
companies will provide partial guarantees on rupee-denominated bonds issued by
Indian companies to finance infrastructure projects. ADB will then take on a
part of that guarantee risk.
The partial credit
guarantees that ADB will provide alongside IIFCL and other finance firms will
boost the credit rating of a typical infrastructure project from BBB- or A to
AA. This will allow cash-rich pension funds and insurers, which can only invest
in assets graded AA or above, to buy the bonds. Replacing bank debt with bonds
will, in turn, allow banks more room to provide loans to other infrastructure
projects and businesses. In time, international investors are also expected to
look to buy Indian bonds.
The infrastructure
developer expected to benefit from the facility is GMR Group, which is seeking
to sell a bond to refinance a loan taken to build and operate part of a toll
expressway linking Hyderabad and Bangalore. Over the next three years, the
facility should provide partial guarantees on up to five infrastructure project
bonds. Having proven the concept, ADB then expects that such credit guarantees
will become well established in the market and ADB can move on to support
Indian infrastructure development in other ways.
“Credit enhancement
will provide the critical missing link which will allow insurance companies and
pension funds to put their sizeable cash to work in the infrastructure sector,”
said Siddhartha Shah, senior Investment Specialist in ADB’s Private Sector
Operations Department.
Insurance companies
have an estimated $300 billion of cash to put to work while pension funds have
an additional $30 billion. Long-term investments that are needed for
infrastructure companies also best match insurance and pension liabilities.