Funding the India Infrastructure Dream

Between the Power Finance Corporation with assets of nearly $750 million in Bhutan and maybe Colombo, Power Grid Corporation, waiting to finance projects worth $3 bn and the India Development Fund that placed Equity in GMR Infra, we had the seeds of interest in India Infrastructure. We also had a educated, well proved market that waited patiently and did not forget the criticality of the sovereign in taking the lead in funding the infrastructure and underline its commitment to fueling the infrastructure behemoth.

Apart from proving its commitment to the reforms, it also created a permanent minimisation of political risk with the sovereign stake translating to a virtual certainty that consequent governments will have to protect its coffers and not let the projects go to waste. The plethora of MoUs and the wasted effort at GIMs in Gujarat and Karnataka underline however the critical nature of this investment from the public account. six power plants with 6MT capacity have been signed in Bellary, more than one commitment ready to be reneged to balance the available resources and the built up projects.

GMR had to cancel a QIP when the real estate bubble screams rent the air in 2008 and many infra funding efforts in the fixed income area after the initial 20% equity has been raised, depend on the sovereign backing and some support from Multilateral development institutions like the World Bank etc. IDFC's earlier avatar and later HDFC itself was borne to put pressure on banking funds to move to infrastructure when the banks cannot look at maturities above 3-5 years without creating a conflict of interest. Today we even have a dedicated $12 bn fund in infrastructure rolling out the debt, while banks are free to deal with their preferences for commercial real estate and the ensuing default risk with the same developers.

The PPP financing of infrastructure and take out mchanisms apart, the real institutional investments in infrastructure have to continue to pay dividends. June has been a great month in this regard. Apart from funding IDBI's capital gap with more than a $750 million, GOI was able to create liquidity of more than $7-8 billion when corporates were absorbing the available liquidity to pay up the 3G licences. In that same buoyant period, REC was able to raise funds for India's rural power footprint where less than 15% of India's 600000 villages are currently electrified.

REC lends at a spread of more than 300 basis points thus maintaining great profitability and while the CURRENT FUNDS ARE NO LONGER avalable at the discounts avl to public institutions, they would still be fortunate to be allowed to be part of the $7bn beng raised this year thru tax free bonds, getting another $1 billion from that route. The international debt issue at the beginning of the month was targeted at European investors and REC was looking for only INR 500 Crores or $100m from the proceeds

 

 

Here are the terms again from Economic Times:

 

Rural Electrification Corp (REC) has raised 12.5 billion rupees via bonds with an integrated swap, two bankers said on Wednesday. It sold 15-year bonds paying a coupon of 8.75 percent, while the swap is linked to a Reuters benchmark plus a spread of 90 basis points with a reset each year, and 210 basis points with a reset every three years. The company had on Tuesday sought bids for at least 5 billion rupees of 10- and 15-year bonds.

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