Project Completion Risk Guarantee Facility July 2014 Page 2 Partial Credit Guarantee Facility for Project Bonds in India Page 3 Background Indian Banking Sector Over 80% of infrastructure projects financed by banks Banks reaching prudential and headroom limits to infrastructure assets 79% of bank deposits have sub 3-year tenure, while projects have over 10-year maturity requirements Banks typically provide floating-rate instruments; increases interest volatility
Indian Infrastructure Sector Private sector debt requirement estimated at over $350 billion during the Twelfth Plan 72% of infrastructure SPVs rated BBB or A; rest: sub-investment grade Significant constraints to expanding resource base from non-banks sources
Page 4 Credit Enhancement for Bonds
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Bond Investors
Project bond issuance
First-loss credit guarantee
Counter guarantee (up to 50% of participating financial institutions guarantee)
Recourse in case of default ADB Project SPV IIFCL Page 5 IIFCLs credit enhancement will be in the form of a first loss guarantee. IIFCL will pay bond holders all scheduled principal and interest payments until the IIFCL-guaranteed amount has been fully paid out. IIFCLs guarantee can therefore bridge temporary cash shortfalls and temporarily avoid a payment default. The size of the IIFCL guarantee is determined by the rating agencies such, that a credit rating on the enhanced bond will be acceptable to institutional investors. As an example, to raise the stand alone project rating from A- to AA, the IIFCL guarantee should be 20-25% of the outstanding principal amount of the project bond; IIFCL charges its annual guarantee fee on its guaranteed amount. As an example, a 2% annual guarantee fee on a 25% enhancement, would result in a 50 bps cost of the enhancement on the principal amount of the bond.
Credit Enhancement for Bonds Page 6 Key Benefits - Issuers Potential to reduce effective interest rate and increase return on equity Increased tenor improves project viability Fixed interest rate reduces financial risk Fewer covenants compared to bank loans Diversification of funding sources
Page 7 Irrigation Storm Water Drainage Systems Telecommunication (fixed network) Telecommunication Towers Education Institutions (capital stock) Hospitals (capital stock) Common Infrastructure for Industrial Parks, SEZ, Tourism Facilities and Agriculture Markets Fertilizer (capital investment) Post-harvest Storage Infrastructure for Agriculture and Horticultural Produce Including Cold Storage Terminal Markets Soil-testing Laboratories Cold Chains
Eligible Sectors Roads and bridges Ports Inland Waterways Airport Railway Track, Tunnels, Viaducts, Bridges Urban Public Transport Renewable Generation Electricity Transmission and Distribution Oil Pipelines Oil/Gas/LNG Storage Facilities Gas Pipelines Solid Waste Management Water Supply Pipelines Water Treatment Plants Sewage Collection, Treatment and Disposal Systems
Page 8 Eligibility: SPVs with a minimum domestic rating of BBB or preferably BBB+ Infrastructure projects in operation for preferably 12 months
Assessment of guarantee requirements: Rating agency will advise on percent of principal to be guaranteed to elevate rating to AA
Costs to issuer: Market-based guarantee fee charged annually on guaranteed principal and interest; guarantee fee expected to apportion coupon savings between issuer and guarantors Origination expenses to include guarantors legal fees
Monitoring and other requirements: Infrastructure project must comply with IIFCLs environmental and social safeguards ADB and IIFCL will conduct routine credit monitoring
Validity: Subject to negotiation; bond and guarantee documentation can be prepared and bond held until auspicious market conditions
Process and Timelines Page 9 Transactions Under Development Welspun Urja Gujarat Pvt. Ltd.: Issue a bond for its 15MW solar power plant at Khirasara Village, Kutch District, State of Gujarat,
Oriental Pathways (Indore): Issue a bond for 2-Lane to 4-Lane Dual Carriageway Nagpur Bypass (NH-7)
CLP Wind Farms: Issue a bond for its 49.6 MW wind power project at Theni, Tamil Nadu, India
BLP Vayu: Issue a bond for its operational wind project at Kutch, Gujarat, India
GMR Jadcherla Expressways Private Limited: Issue a bond for its NH-7 road project Bengaluru-Hyderabad Page 10 Project Completion Risk Guarantee Facility for India Page 11 Infrastructure investment is negatively impacted by delays and cost overruns As of October 2013, 301 of 738 central sector projects were delayed, due to: land acquisition, rehabilitation, and resettlement right-of-way forest and environmental clearances funding constraints supply of material and contractual issues Project delays lead to mounting NPAs and stressed assets gross NPAs and restructured advances for infrastructure increased from INR121.90 billion (4.66%) in March 2009 to INR1369.70 billion (17.43%) in March 2013 (Source: RBI) Problem in raising equity due to lower-than-expected returns on account of delays The Problem Page 12 The stress is reflected in lower project credit ratings The power and roads witnessed the highest rating downgrades in FY2012-FY2013 shift of ratings towards BBB to C/D categories over FY2012-FY2013
The Problem Page 13 Against a target of awarding road projects of 50,621 km in FY2008- FY2013, only 10,690 km were awarded Delays in financial close, land acquisition, and environmental clearances Out of 16 Ultra Mega Power Projects, contracts for only 4 were awarded and only 1 has become operational Lack of clarity on coal import, forest clearances and land acquisition delays Out of 576 approved SEZs, only 172 are operational The Impact Page 14 Establish a fund (via a long term ADB loan) to provide a guarantee to the project SPV against delays attributable to the contracting authority In case of a delays under the concession by the contracting authority, the guarantor will pay the guaranteed amount to the banks Successful sovereign facilities exist in Indonesia, Mexico, Chile and Brazil Options: i. The product is established as an insurance whereby the project pays a premium ii. The guarantee pay-outs devolve on the concessioning authority as a loan iii. The guarantee pay-outs are treated as a take-out transaction from the banks and the paid-out amount becomes a liability that devolves on the project company Risk mitigation will reduce debt and equity cost for the SPV and compensate for the fee.
The Proposal Page 15 Project SPV Bank(s) Greenfield risk mitigated by completion risk guarantee Brownfield risk mitigated by PCG type structures Project sponsors are interested in comprehensive risk solutions: Blending sub-debt, project completion risk guarantee, PCG, etc. Completion Risk Guarantee Provider Project Completion Risk Guarantee Guarantee payout by guarantee provider Option III Potential Structure Page 16 Guarantee provided selectively Only for unexpected risks Well defined risks; outside the concession agreement Risk Management Plan to be submitted when applying for guarantee For a finite period; maximum period of 2-3 years Commercially-priced guarantee fee
Key Aspects of Guarantee Structure Page 17 Current Activities Technical study on the following aspects:
1. Business plan for proposed facility 2. Size of initial corpus (ADB loan) 3. Risks and sectors to be covered 4. Maximum guaranteed amount 5. Pricing principles 6. Where to house the proposed facility Currently proposed in IIFCL 7. Technical support required to make facility operational.