The Indian economy is going through tough times. Weak consumption demand, subdued private investment, low industrial output, the depreciating rupee and turbulence in the financial system resulted in a difficult 2019-20. And now, the Covid-19 outbreak has exposed the economy to vulnerabilities in the healthcare system and supply chains. Although the nationwide lockdown imposed in late March 2020 has been eased, the economy remains severely disrupted, with states imposing local lockdowns and other restrictions. India’s GDP is expected to contract significantly in 2020-21, with industry veterans predicting that it will shrink by 5-7 per cent.
The disruptions caused by Covid-19 have led to heightened financial stress across the board. With limited funding from banks, companies have tapped the bond market to create a liquidity buffer to deal with uncertainties. Strategic and institutional investments have been low in the past four months due to valuation concerns. However, long-term investor interest continues to be high owing to lucrative opportunities in the infrastructure space.
The government’s ambitious target of Rs 111 trillion in investments under the National Infrastructure Pipeline (NIP) between 2019-20 and 2024-25 is likely to face severe headwinds due to the pandemic. Lower GDP projections have a bearing on the viability of infrastructure projects. The NIP task force has suggested ways and means of financing projects through deepening of corporate bond markets, setting up of development financial institutions, accelerating monetisation of infrastructure assets, etc.
Lending from banks and NBFCs
Credit flow to infrastructure projects exhibited a negative growth rate of 0.2 per cent in 2019-20 as against 19 per cent growth in 2018-19. Bank credit outstanding to infrastructure as of June 2020 is around Rs 10.7 trillion. While lending to infrastructure had already declined significantly in 2019-20, Covid-19 has made banks even more cautious. For instance, valuation of toll projects has become difficult and this has led to subdued lender interest. Meanwhile, the extension of moratoriums, provision of credit for relief measures, etc. have left banks with limited headroom for fresh lending to infrastructure.
Currently, many non-banking financial companies (NBFCs) are sitting on bad loans and facing asset quality pressures, particularly on their wholesale lending book. A slew of supportive measures have been announced in the past few months to clean NBFCs’ books to some extent. These include portfolio buyout by banks and relaxation in priority sector lending norms. Further, the pandemic has also impacted borrowers’ repayment capabilities and in turn the liquidity profiles of NBFCs.
The Reserve Bank of India (RBI) recently unveiled a one-time debt restructuring scheme for pandemic-hit businesses to try and avert a surge in bad debts as the economy reels from the impact of Covid-19. The central bank has also appointed a committee to lay out principles for the scheme, including safeguards, entry norms and post-restructuring monitoring. RBI had already announced a debt moratorium for Indian corporates for six months as soon as the lockdown was announced. This helped many corporates conserve cash and restart their operations after the lockdown was lifted.
Corporate bond issuances have picked up momentum as companies prepare their balance sheets to weather financial uncertainties on account of the virus outbreak. During the first quarter of 2020-21, Indian corporates raised about Rs 2 trillion through the issuance of rupee bonds. This is a steep rise in contrast to the Rs 1.3 trillion raised through the private placement of corporate bonds during the April-June period of 2019-20. Several AAA-rated entities including NBFCs tapped the market to raise funds under RBI’s targeted long-term repo operations (TLTRO) and long-term repo operations (LTRO) facilities. In March 2020, RBI introduced TLTRO, under which banks can access three-year funds up to Rs 1 trillion to invest in corporate bonds. Reliance Industries, the Tata Group, Larsen & Toubro, the Power Finance Corporation and the Indian Railway Finance Corporation were among the big issuers of debt papers during the first quarter of 2020-21.
Green bonds continue to attract a lot of interest from public and private sector corporations alike that are opting to raise funds, especially for renewable energy projects. These include Azure Power, NTPC Limited, Greenko, ReNew Power and YES Bank. This category of bonds has also received marked attention from regulatory authorities to encourage further issuances.
Private equity deals
Amidst all the gloom, private equity (PE) investments in infrastructure have been high during the past year. In 2019-20, an investment of around Rs 700 billion in infrastructure was routed through PE firms and venture capitalists (VCs). This year, however, activity was only driven by a spate of PE funding in Jio Platforms. Barring the Jio Platforms outlier deal, the PE/VC environment has been tepid in the ongoing fiscal year. Only the renewable and logistics sectors were able to find favour among VCs.
PE funding in the first quarter of 2020-21 stood at over Rs 30 billion across 12 deals. This is excluding the PE investments in Jio Platforms. The April-June quarter of 2020-21 saw a steep decline of over 70 per cent in terms of deal value vis-à-vis the corresponding quarter of 2019-20 and a fall of around 35 per cent from the previous quarter (January-March 2019-20).
In the past four months, Jio Platforms raked in over Rs 1.5 trillion through 14 investments. These investments are especially significant at a time when the world is grappling with the Covid-19 outbreak and businesses are taking a severe hit. Recently, Reliance Industries Limited (RIL) launched a rights issue garnering around Rs 531 billion, becoming India’s largest ever rights issue. Together with the investments in Jio Platforms, it helped RIL become net-debt-free ahead of its deadline of March 2021.
New funding sources
India’s quasi-sovereign wealth fund, the National Investment and Infrastructure Fund (NIIF) has been on the lookout for infrastructure investment opportunities. In the past four months, the NIIF has collaborated with NTPC to build sustainable energy infrastructure in the country. It is also keen on participating in the railway privatisation process. The fund is looking to tap overseas investors to shore up capital of its new shadow banking unit, Aseem Infrastructure Finance Limited. With regard to fundraising, the NIIF recently secured funding of $100 million from the Asian Development Bank (ADB). In addition, the government is working on an equity infusion of Rs 60 billion into the NIIF’s subsidiaries to help fund infrastructure projects.
India has emerged as a top borrower from the China-sponsored Asian Infrastructure Investment Bank (AIIB), which is looking to provide loans worth $3 billion for large infrastructure projects over the next 12 months. Besides AIIB, other multilateral institutions such as ADB and the World Bank have made commitments towards the power, road and urban rail sectors during the past four months.
Global investors, including sovereign wealth funds and pension funds, have shown a great deal of confidence in the country’s growth story, the current economic downturn notwithstanding. However, the prolonged lockdown and uncertain economic outlook are compelling foreign investors to rethink their short-term investments in the country. For instance, many planned road asset acquisitions are unlikely to be completed due to traffic risks. Owing to uncertainty in traffic recovery due to individual lockdowns in states, valuations of road assets have been impacted. While the Covid-19 pandemic has deferred the investors’ current plans, their long-term investment strategy is to stay focused on emerging economies such as India through co-investments or direct acquisitions.
A lot of this institutional investor interest is in infrastructure investment trusts (InvITs). With six InvITs already up and running and many more in the offing, the instrument is gradually finding its feet. Tata Power and Infrastructure Leasing & Financial Services recently unveiled plans to launch InvITs. The product has received much regulatory attention and there is increasing investor participation as well. According to ICRA, in the next five years, fundraising through InvITs is estimated to be Rs 2 trillion (Rs 800 billion in the next one year). A lot will depend on the regulatory and tax regime, while uncertainty due to Covid-19 may delay InvITs that are in the pipeline. InvITs of the National Highways Authority of India and Power Grid Corporation of India Limited will be the most watched, given the size and track record of their operational projects.
The government, in tandem with regulators, has taken numerous steps to pull the economy out of the current crisis. The economic packages announced in May 2020 were aimed at supporting various segments, including micro, small and medium enterprises, NBFCs, agriculture, healthcare and infrastructure. Other relief measures such as extension of moratorium, policy rate cuts, the LTRO option and a one-time debt restructuring have also been welcomed. On the flip side, rising corporate debt can turn delinquent and further strain the banking system. Cautious lenders are already lending selectively to top-rated companies with credit “crowding out” for weak sponsors. Economic revival through revenue generating infrastructure asset creation can break this vicious cycle. Stressed companies are opting for debt restructuring in order to get some relief. Refinancing will not be an issue as lenders are comfortable about refinancing operational projects.
As the pandemic has constrained bank credit and government expenditure for the ongoing fiscal year, funding from alternative sources will gain prominence. To this end, the government has already started work on setting up a development finance institution for infrastructure. The central bank is also laying stress on diversifying financing options for infrastructure such as asset recycling through the toll-operate-transfer model and InvITs, as well as project finance. This is critical since it has been widely acknowledged that new funding avenues will have to be developed and tapped for meeting the huge financing requirements and opportunities highlighted under the Rs 111 trillion NIP.