Infrastructure financing in India faces many obstacles, ranging from the excessive cost of raising capital to lack of long-term funding. It becomes challenging to finance infrastructure projects, mainly due to the insufficiency of capital and liquidity in banks and non-banking financial companies as well as sectoral constraints. Traditionally, governments have been the only financiers of infrastructure projects in the country. Of late, there has been a significant shift in general perspective that this strategy may not be ideal for financing large-scale projects. This has led to a gradual migration from the banking sector to the bond market. The future of infrastructure financing lies in the bond market.
The National Infrastructure Pipeline (NIP) estimates an investment requirement of Rs 111 trillion by 2025. Corporate bonds are expected to contribute 6-8 per cent of the NIP investments, which is consistent with historical trends. Innovations including asset pooling, a well-capitalised credit guarantee enhancement corporation, and extensive use of the INFRA EL rating scale could help raise an additional Rs 7 trillion-Rs 10 trillion through infrastructure bond issuances.
The strengthening of India’s corporate bond market is essential for fulfilling the financial requirements of the infrastructure sectors. However, the corporate bond market is still in its infancy and needs to go a long way to match the equity market. While the country’s equity market continues to witness record capital inflows, foreign investors are leaving the bond market.
A snapshot of the recent bond issuances in the infrastructure space…
Recent bond issuances
In June 2021, ICICI Bank Limited, which is India’s leading private sector lender in terms of total asset volume, raised Rs 30.01 billion through infrastructure bonds for the first time in the past four years. The bonds carried a 6.45 per cent interest rate with a seven-year maturity. The base issue size was fixed at Rs 10 billion, with an alternative for retaining subscriptions up to Rs 40 billion. ICRA rated with the issue as AAA, indicating a high degree of creditworthiness and the highest ability to repay investors. Two pension funds, LIC New Pension Scheme and UTI National Pension Scheme; fund houses like Aditya Birla Mutual Funds and Tata Mutual Funds; and insurer Bajaj Alliance General Insurance are said to have subscribed to those bonds. The proceeds from the bond issuance will be utilised to finance infrastructure projects as well as low-cost, affordable housing. ICICI Bank had issued infrastructure bonds worth Rs 40 billion in 2016-17.
In April 2021, the board of directors of IndiGrid Investment Managers Limited, acting as investment manager for the India Grid Trust (a power sector infrastructure investment trust), approved the public offering of rated, listed, redeemable non-convertible debentures (NCDs) that have a face value of Rs 1,000 each for an amount up to Rs 1 billion for the base issue size with an option to retain up to Rs 9 billion in case of oversubscription. The bond issue targeted the four groups of investors – financial institutions, corporations, high-net-worth individuals and retail investors. The India Grid Trust received more than double the subscriptions for its maiden public bond offering, in spite of the economic downturn in the country. With the Insurance Regulatory and Development Authority permitting insurance companies to invest in debt securities of infrastructure and real estate investment trusts, this NCD issue witnessed a surge in participation from insurance businesses.
In May 2021, JSW Hydro Energy Limited, a subsidiary of JSW Energy Limited, raised $707 million through a green bond issue to international investors. The green bond issue was oversubscribed by four times and was closed at a significantly lower rate than the initially guided rate. The initial price guidance was 4.5 per cent over the US treasury, but the issue eventually closed at 4.125 per cent. As of May 2021, this 10-year bond issue, which is due to mature in 2031, is the first green bond issuance in India in the current fiscal. The receipts from the bond issuance were utilised to settle the debt from two operational hydro projects – the 300 MW Baspa II and the 1,000 MW Karcham Wangtoo, both located in Himachal Pradesh.
ReNew Power Private Limited raised $585 million in April 2021 through its dollar bond offering. The proceeds from the bond issuance will be used to refinance the debt of operating wind and solar assets, which have a combined capacity of around 803 MW. The bonds have a maturity of 7.25 years and a fixed interest rate of 4.5 per cent per annum. These bonds received a Ba3 rating from Moody’s Investors Service, indicating they are speculative in nature and are subject to substantial risks. The bond offering came at a time when ReNew Power announced a merger agreement with RMG Acquisition Corporation II, a Nasdaq-listed special purpose acquisition company. ReNew Power is one of India’s most consistent dollar bond issuers, having raised $460 million through a bond offering in February 2021. Prior to that, the company raised $325 million by offering bonds to global investors in October 2020.
In February 2021, Bharti Airtel Limited raised $1.25 billion through the issuance of its first-ever dual-tranche US dollar bond offering spread across senior and perpetual issuances. This was the largest bond issuance by any Indian investment-grade issuer since January 2019. The bond issue was part of the company’s strategy for the subsequent spectrum auctions. Airtel priced its 10.25-year-old senior bonds at $750 million at a yield of US 10-year treasury plus 187.5 basis points for an implied coupon rate of 3.25 per cent. Meanwhile, Airtel’s wholly owned subsidiary Network i2i Limited raised $500 million in guaranteed subordinated perpetual NC 5.25-year bonds with a coupon of 3.975 per cent. The order book was oversubscribed by almost three times on final pricing, and the peak order book recorded $5 billion. According to market reports, the offering was significantly oversubscribed, with strong demand from several Asian, European and American funds.
The Power Finance Corporation (PFC) has plans to raise Rs 100 billion through bond offerings in two tranches. The first tranche, of Rs 50 billion, was issued in January 2021. PFC’s Rs 50 billion taxable NCD issue, which included a Rs 45 billion greenshoe option, was oversubscribed close to nine times. As per Bombay Stock Exchange data, PFC received a subscription worth Rs 44.77 billion against the Rs 5 billion base issue size of NCDs on offer. The bonds were issued to four categories of investors – institutional, non-institutional, high net worth individuals and retail individual investors. The bonds had a range of maturity periods such as 3 years, 5 years, 10 years and 15 years. With respect to institutional and non-institutional investors, the interest rates for bonds carrying maturities of 3, 5, 10 and 15 years have been fixed at 4.65 per cent, 5.65 per cent, 6.53-6.8 per cent and 6.78-6.95 per cent respectively. For bonds with maturities of 3, 5, 10 and 15 years, the interest rates for high-net-worth individuals and retail individual investors would be around 4.8 per cent, 5.8 per cent, 6.78-7 per cent and 6.97-7.15 per cent respectively.
In January 2021, GMR Hyderabad International Airport Limited (GHIAL), which is a subsidiary of GMR Airports Limited, and GMR Infrastructure Limited entered into a purchase agreement to issue and allot $300 million through 4.75 per cent senior secured notes with a five-year maturity in the international bond market. The proceeds from the bond issuance will be used to finance capital investments in the expansion of Hyderabad’s Rajiv Gandhi International Airport to raise its capacity to 34 million passengers per year. Moody’s Investors Service issued a Ba2 rating to GHIAL’s bond offering, indicating a high degree of credit risk attached to the bond issue.
The way forward
The bond market can provide infrastructure corporations with long-term, fixed rate financing. Many infrastructure corporations fail to access bond markets mainly due to their low credit ratings combined with other factors. In order to make infrastructure funding more accessible through bond markets, the government should consider introducing a separate exemption limit for mutual funds towards exposure to bonds issued by infrastructure companies. The government should also focus on eliminating the the risk averseness of investors and the riskiness of projects. According to industry experts, a separate category of bonds should be created for infrastructure financing. Innovation and regulatory enablement are also critical in this regard.