The country's first credit enhancement product will soon take off, thanks to India Infrastructure Finance Company Ltd (IIFCL).
The first pilot transaction will be for a road project developed by GMR J Expressways, a special purpose vehicle of GMR Group, at Jadcharla, a town in Mahbubnagar district in Andhra Pradesh.
Through credit enhancement, a lender is provided with reassurance that a borrower will honour the obligation through additional collateral or third party guarantee.
It reduces credit/default risk of a debt, thereby, enhancing credit rating and lowering the interest rates on the debt.
The launch of credit enhancement product by the Finance Minister, Mr Pranab Mukherjee, later this week will pave the way for development of infra bond market in the country, Mr S.K. Goel, Chairman and Managing Director of IIFCL, told Business Line here.
Credit rating
For this first pilot, IIFCL will provide partial guarantee to the tune of 15 per cent of the bonds to be issued by the project developer.
This would help enhance the credit rating of GMR J Expressways to ‘AA' from ‘A', thereby, helping the SPV to raise funds from insurance and pension funds besides other investors, Mr Goel said.
The state-owned infrastructure lender will charge a guarantee fee from the SPV for credit enhancement to the project bonds.
Insurance companies avoid infrastructure bonds with credit rating lower than ‘AA'. This is mainly due to regulatory requirements as bonds with credit rating lower than ‘AA' are not considered investment worthy by the insurance regulator.
IIFCL will also enter into a risk sharing agreement with the Asian Development Bank, which will reinsure to the extent of 50 per cent of the guarantee provided by the state-owned infrastructure lender.
Mr Goel said that IIFCL was looking to undertake 4-5 pilot transactions of credit enhancement before end March, involving provision of partial guarantee for total bond size of Rs 2,000 crore.
As many as 14 transactions are in the pipeline at various stages, he added.
Under IIFCL's credit enhancement scheme, the minimum standalone credit rating of the infrastructure project to be credit enhanced should be at least ‘BBB' (before credit enhancement by IIFCL).
The funds raised by the infrastructure project through project bonds credit enhanced by IIFCL shall be used exclusively to repay the existing debt to existing lenders of the infrastructure project.
IIFCL sees strong appetite among infrastructure developers for the proposed credit enhancement product.
Already, infrastructure biggies such as Larsen & Toubro, GVK Group have evinced interest in this product.