Lenders are now prioritising shorter tenors and funding completed projects, aiming to avoid construction risks. Refinancing has also gained prominence. At a recent India Infrastructure conference, industry experts shared their insights on their experience in project financing, the changing funding landscape and the regulatory environment. Excerpts…
Subhasis Dhal
India Infrastructure Finance Company Limited (IIFCL) primarily offers loans with competitive interest rates for infrastructure projects on a long-term basis, with a minimum tenor of 10 years. When lending independently, IIFCL’s loan pricing is linked to its base rate (8 per cent per annum at present) – one of the lowest in the market.
Refinancing is a critical aspect for lenders in project financing. These loans typically have long-term tenors of 10-25 years, but commercial banks often do not remain involved for the entire period due to their asset-liability mismatches. Hence, every five or seven years, these loans are refinanced by new lenders. Developers also stand to benefit from refinancing, as it often provides better loan pricing offered by the new lenders.
Developers are now exploring project bonds, due to better revenue visibility after the construction period. Further, infrastructure investment trusts (InvITs), particularly in the road sector, are taking over completed projects and refinancing the associated debt through the new lenders.
The new sectors in which IIFCL sees potential include data centres (with India now transitioning to a digital economy), e-mobility, battery storage, charging infrastructure and city gas distribution.
Anurag Dwivedi
When project finance as a concept was envisaged in India, it was slated to be non-recourse funding, leading to the primary security being the cash flow of the project. Over time, things have shifted. Now, lenders’ trust depends on the kind of support the promoter can provide. These include the promoter’s support undertaking, corporate guarantee of the promoter and personal guarantees, depending upon the credit rating of the particular project.
Group projects are being funded by banks. Here, a pool of operational projects, where the risk is already hedged, are clubbed and funded as a single pool of assets under the restricted group structure, through cash pooling of special purpose vehicles. This financial year has seen innovative structures being proposed and funded. For instance, a green hydrogen and ammonia project in Oman, being developed by ACME, is being funded by Power Finance Corporation Limited via rupee lending.
For greenfield projects, though interest rates vary from the parent organisation’s rating and the kind of guarantee being provided, the rate typically varies between 9 and 10 per cent on average. The typical tenor for banks is in the range of 10-15 years.
In terms of overall financing, while several initiatives have been undertaken by the government, there is still a lot more to be done. Firstly, there is a need to clearly define infrastructure sector under the harmonised list. This is because, currently, various sectors such as electric vehicles, smart metering, green hydrogen, and green ammonia projects – which require funding – fail to qualify as part of the infrastructure sector from players such as the National Bank for Financing Infrastructure and Development and the National Investment and Infrastructure Fund. Secondly, more policy interventions are required in the bond market.
Jyoti Prakash Gadia
Earlier, transactions extending beyond eight to 10 years were generally not preferred. Now, bigger and longer tenor transactions are carried out with a put-and-call option and more banks joining in, adopting the same model. Recently, we carried out a 16-year transaction with the put-and-call option. We have also financed greenfield projects across four sectors – mining, ropeways, multimodal transportation and student housing.
Some of the emerging asset classes include waste-to-energy, mining, gas pipelines, sanitation, irrigation, ropeways and multimodal transport.
The rate of interest is determined by factors such as whether the project is in the pre-construction phase or the post-construction phase, whether a personal guarantee or corporate guarantee is given, and the rating of the parent company. However, for a typical A-rated and above entity with a corporate guarantee, the spread on a one-year marginal cost of fund-based lending rate (MCLR) can go down to approximately 35-50 basis points.
The cost of capital for Indian projects has remained approximately the same over the past two to three years. For a client to avail of refinancing, several conditions must be met. These include the original loan sanctioned being more than three years old, the rating should have increased by at least two notches, and at least 10 per cent of the loan outstanding must be retained; with this, around a 50 basis point rate of interest benefit can be obtained.
Prashant Murkute
The project financing landscape has significantly evolved over time. In the past, there have been various challenges in project financing, including issues related to right of way, delays in approvals, long gestations and uncertainty regarding toll revenues after project completion. This has led to projects in sectors such as power and roads being stuck. The majority of funds have been directed towards unfinished projects. For example, in build-operate-transfer-toll projects, execution timelines initially planned for a period of three years were extended due to delays in land acquisition. Further, the traffic that was projected during the initial assessment based on traffic reports deviated significantly from the actuals.
Newer models now incorporate several safeguards. The government, in collaboration with concession authorities like the National Highways Authority of India and the Airports Economic Regulatory Authority, has been supporting the infrastructure sector by streamlining concession agreements. For instance, in road projects, the hybrid annuity model (HAM) includes provisions for termination payment during construction, and various schemes have been introduced to provide liquidity relief to projects, enhance budgetary support and make concession agreements more bankable. The concession agreements for toll-operate-transfer (TOT) projects have a clear line of termination amount, which makes these projects more bankable. However, support is still required for newer segments such as smart meters. Introducing a central government institution, like Solar Energy Corporation of India Limited, as a counterparty could help eliminate discom-related credit risks from the model. Further, it is crucial to implement measures to prevent aggressive bidding in sectors such as roads and to maintain the quality of roads. This is to safeguard the interest of investors who remain invested in the projects for a longer duration. Moreover, there is a need to enact reforms to develop India’s underdeveloped secondary infrastructure loan market.
In recent years, project financing has made a comeback, with shifts in preferences. Investors now favour projects with shorter implementation periods (such as solar projects with a 10-12 month construction period) and higher predictability in cash flow streams. In the case of longer project execution periods, investors prefer structures like HAM, which includes provisions for termination payments by authorities in case there is a default during construction. Platforms that house completed projects, such as InvITs, have increased bankability. Additionally, TOT projects where there is no construction risk involved and the existing traffic is known, are also well received in the banking community.
In terms of greenfield projects being announced, India is only lagging behind countries such as the US, the UK and the UAE. The structures of greenfield financing differ based on the sector, credit rating, execution period and counterparty (especially in the power sector). Structuring transactions in greenfield projects continues to face challenges. There is a need for stronger and tighter legal frameworks, with a preference for shorter construction risk periods. Project construction periods are usually preferred to be around two to three years. Financing, on the other hand, is carried out for 10-18 years, with refinancing as another option. The interest rate is typically very competitive, ranging from 9-9.5 per cent to 10 per cent, depending on the credit ratings.
The current market is highly competitive, with stakeholders wanting to secure good assets. On average, loans remain with a financial institution for about five years, after which, sponsors refinance the institution. With regard to the repayment tenors generally acceptable for solar projects, it is about 15-18 years with a five-year put/call option. After demonstrating a generation track record for a period of five years, projects are considered suitable for refinancing through non-convertible debenture markets for the next five to seven years.
Dr Siddharth Srivastava
Tax issues related to corporate guarantees are a constant matter of debate, followed by how transactions are to be structured if any group is unwilling to provide a corporate guarantee. Many projects are now incorporating shortfall undertakings as part of their financial arrangements. Further, pooling assets and carrying out common financing have become more prominent. However, cross-collateralisation issues continue to exist.
There has also been a significant shift, with personal guarantees no longer being furnished as regularly as they used to be. With the personal guarantee regime now partly coming into force under the insolvency framework, personal guarantors to corporate debtors can now be declared insolvent.
Refinancing has become increasingly common in recent times. In some cases, such as transmission projects, refinancing has occurred within a year. The transmission sector has also seen several big-ticket refinancing, with one group reportedly having saved around 400 basis points per year.
With respect to infrastructure financing, from a lender perspective, one proposed change could be the recognition of InvITs under the Insolvency and Bankruptcy Code (IBC). Secondly, lenders face challenges regarding taking shortfall undertakings under the IBC framework. Going forward, there is a need to clarify if shortfall undertakings can be categorised as financial debt or not. Further, with land acquisition being a major issue, plug-and-play models should be explored as a potential solution.
