Debt funding for new infrastructure projects is facing bottlenecks with private equity (PE) funds exiting from investment commitments.
Banking sources said that only the existing pipeline sanctions were being disbursed. However, banks are not prepared to release debt funds to some planned power projects, including ultra mega power projects. This is because promoters have relied substantially on PE funds. PE funds, in the past, had resorted to using leveraged buyouts. This implied using borrowed funds for acquiring equity stakes in new projects. PE funds had committed equity funding in some projects up to 49 per cent.
However, with global deleveraging now becoming the rule, PE funds are no longer prepared to commit equity in India. In fact, PE fund investments in all the big ticket projects have virtually disappeared.
This is despite low operational and financial risks in power, highways and refineries. Bankers said that in most power projects awaiting financial closure, revenue risks are minimal. This is because the forward linkages in the form of a power purchase agreements with the electricity boards or with distribution companies have already been tied up, backed by bank guarantees and assignment of buyer’s revenues.
Yet, the promoters’ inability to source PE funds stemmed from the massive tightening of global liquidity. The sources said that most of the PE funds are currently deleveraging.
“So where is the question of investments at this moment,” the bankers asked.
The inability to raise equity funds now implies that debt funds would also not be coming for the moment. This is despite some banks relaxing the debt service coverage ratios (DSCR) for infrastructure norms. This is also because domestic promoters are not in a position to bring large equity funds.
Currently, banks are insisting only on 1.25 times. Last year, for instance, the DSCR applied was 1.5 times.
This ratio measures the ability of the borrower to service the debt during the tenure of the borrowings.
Project financiers normally insist that the net operating revenues be at least 1.5 times more than the debt service payments.
As a result, the only borrowers for new projects are from state-owned corporations that includes entities such as the National Thermal Power Corporation, National Hydroelectric Power Corporation and refineries. Last week, for instance, the Indian Oil Corporation had raised Rs 1,600 crore through 8-year bonds at 10.7 per cent.
Power Grid also managed to raise Rs 1,000 crore through 15-year bond issues, early this week. These bonds were entirely picked up by public sector banks.
However, for private sector projects, funding is increasingly becoming difficult. Bankers said that some project debt-equity ratios could also be relaxed in the coming weeks for ensuring funding availability to power projects on a case by case basis.
“But even if the equity component is reduced, promoters will still have to comply with the minimum DSCR,” the bankers said.
Source: Business Line