NHAI circular on Securitization of cash flows

An NHAI Circular dated 29/05/2013 has placed a cap on securitization proceeds of BOT (Toll) projects. The contents of the circular are as follows:

“The issue regarding Securitization of future casf-flow in BOT (Toll) Projects was discussed in the 94th Board Meeting of the Authority held on 14/05/2013. With a view to ameliorate the shortage of equity and improve liquidity of the prospective bidders, Board approved the proposal for granting of permission by NHAI to the Concessionaires of BOT(Toll) projects, which have Toll revenues significantly surplus to the repayment obligations, to raise subordinate loan on the strength of future surplus cash flows of their operational BOT road projects subject to the following conditions:

a)  Raising of subordinate loan upto 30% of TPC of NHAI would be allowed only after COD of the project is achieved in case of 4-laning projects and construction is completed in case of 6-laning Projects

b)  Repayment of such loan would be the last priority under the waterfall mechanism of the Escrow Agreement. It would be allowed only after meeting all kinds of statutory levies / taxes, O&M expenses, concession fee, damages and other dues of the Authority and Debt Service along with interest due.

c)   Submission of an undertaking by the Concessionaire that it would not enhance the amount of Debt due, Termination Payment or any other liability of NHAI in any manner whatsoever.

d)   Receipt of NOC from the existing lenders of the Project

e) Receipt of such loan, giving of loan to the parent company, Servicing and repayment of loan by the parent company and servicing and repayment of the subordinate loan would be routed through Escrow account of SPV.

f)  Such loans would be used exclusively for investment as equity in road sector projects 

g)  Statutory Auditors of the SPV as well as the Group Company availing the loan from the concessionaire shall provide the details confirming the name of the project, the Authority awarding the project, TPC of the project, sources of funds and the amount of the equity invested within three months of availing such loan.

This has the approval of the Board of the Authority in its 94th Meeting held on 14/05/2013.”

Raising debt just became easier! (for infra companies)

Sources:

Economic Times (29 Apr 2010): http://bit.ly/aLi8LE

ICAI.org (ECB guidelines 2004): http://bit.ly/dBxMyR

Infrastructure companies may soon be able to refinance part of their domestic debt through borrowings overseas. This will allow them to raise funding from a wider range of sources, and give them access to cheaper loans as interest rates head higher in India. A high-level committee on ECB, managed jointly by the finance ministry and RBI, had discussed the proposal in relation to funding of power equipment but opened a window to allow refinancing of debt taken for equipment purchases for other infra sectors as well. 

Currently, companies can borrow overseas at an average rate including currency hedging costs at around 9-10% (LIBOR + 450-500 bp spread + 3-4% hedging cost), which is still lower than domestic credit. However, for some sectors in infrastructure like ports which have income in foreign currency, it may turn out to be even cheaper since hedging costs do not have to be accounted for.

Long-term financing is not easily available from the local lenders, particularly banks that have a asset-liability mismatch issue when they provide long-term funding from their deposit funds that typically have a 3-5 year maturity. Moreover, India will need over $1 trillion of funds over the twelfth plan for the infrastructure sector. A greater access to overseas funds will help raise cheaper funds for executing infrastructure projects. 

The selective nature of the relaxation, limiting refinancing to only equipment purchases, was due to concerns over capital inflows and their monetary policy implications. Capital flows into emerging economies such as India are expected to rise with recovery in the global economy. 

The concern was echoed by the Reserve Bank of India (RBI) governor. “The surge in capital flows into some emerging market economies even as the crisis is not yet fully behind us has seen the return of the familiar question - the advisability of imposing a Tobin type tax on capital flows.”

Jindal Power ties up Rs 10,057 cr from 23 lenders

Source:

NDTV Profit (6 Apr 2010): http://bit.ly/colEwl

Domain-b.com (7 Apr 2010): http://bit.ly/aeKL42

Jindal Power has achieved financial closure for its Rs. 13,410 crore expansion project of an existing 1000 MW thermal power plant to 2400 MW capacity at Tanmar in Raigarh district of Chhatisgarh. The execution of the loan agreements was concluded on the 26th March, 2010.

The total project project cost of Rs. 13,410 crore is financed on a Debt-Equity ratio of 3:1, with an RTL of Rs. 10,057 crore and Equity/Internal Accruals of Rs. 3353 crore. A 23 member consortium has sanctioned the loan at a average rate of 10.50% under what they are calling a 'unique two-tranche structure to meet the requirements of Jindal Power and the lenders'. SBI Capital Markets was the sole adviser and arranger of the deal. JM Financial, Enam Securities, Deutsche Equities, Goldman Sachs, ICICI Securities, UBS Securities and SBI Capital Markets were the lead managers for the issue.

Quoting a press release: "Under the financing arrangement, SBI Capital Markets has framed a two-tranche structure to meet the requirements of both Jindal Power and lenders. The blend of project finance and conventional debt financing has helped both parties to arrive at an optimal risk allocation structure. While the structure gives Jindal Power more flexibility in its other borrowing programmes by isolating project risk, lenders derive comfort from the company’s balance sheet".

Sounds to me like an SPV arrangement funded by a term loan, and perhaps a slice of debt to Jindal Power, injected into the SPV as equity. This allows Jindal Power to keep most of the debt off its financials, while retaining some of it on its own balance sheet to reduce the overall risk attached to the entire debt component. The last part is pure conjecture, any additional information/correction is more than welcome!