ADB launches India infrastructure bond guarantee programme

Abstract

Up to five infrastructure project bonds in India will be guaranteed by the Asian Development Bank (ADB) in order to mobilise funds that currently cannot invest in the debt, but the scale of the project could be too small to make a real difference to the country's infrastructure sector. The bond guarantee facility, developed with the India Infrastructure Finance Company Limited (IIFCL) is worth US$128 million, and the ADB as well as domestic finance companies will provide partial guarantees for rupee bonds issued by Indian companies to finance infrastructure projects. This will boost the credit rating of the debt from around BBB- to A or AA, thus enabling pension and insurance companies to invest in the bonds, according to Juan Miranda, director general of the South Asia Department at the ADB.

The ADB's proposed US$128 million guarantee for India infrastructure bonds is positive but the scale is too small for it to have any real market impact at this stage.

Up to five infrastructure project bonds in India will be guaranteed by the Asian Development Bank (ADB) in order to mobilise funds that currently cannot invest in the debt, but the scale of the project could be too small to make a real difference to the country's infrastructure sector.

The bond guarantee facility, developed with the India Infrastructure Finance Company Limited (IIFCL) is worth US$128 million, and the ADB as well as domestic finance companies will provide partial guarantees for rupee bonds issued by Indian companies to finance infrastructure projects.

This will boost the credit rating of the debt from around'BBB-' to'A' or'AA', thus enabling pension and insurance companies to invest in the bonds, according to Juan Miranda, director general of the South Asia Department at the ADB.

"We might be able to develop a home grown bond market for projects by bringing in the considerable savings that exist, located in the pensions and insurance houses in the country, which can't take part in projects [at the moment] because they have to be of a certain quality," he said to Asiamoney PLUS on September 20.

The first bond guaranteed will be issued by GMR Group, which wants to sell a bond to refinance a loan taken to build on a toll expressway linking Hyderabad and Bangalore. Over the next three years, Miranda hopes the scheme will guarantee up to five similar infrastructure project bonds.

He argued that unless schemes like this are put into action, it will become increasingly difficult to finance infrastructure projects in the country.

"The banks are already fully stretched and they are getting close to their exposure limits. Unless we create space then the plan to do more and better infrastructure will be coming apart so that's why this is so important," he said.

Many different infrastructure project guarantees have been discussed in the past, but no bonds have been issued to date.

The first deal under this scheme will take the form of a private placement. Miranda hopes that in the future, the ADB will be able to guarantee listed bonds, but at the moment, limitations prevent this.

"But the next thing would be to explore where the big impediments for listed placements are. They would need to be tackled head on but with common sense. We see restrictions in both the pension and insurance market but also in the way the paper quality is being looked at, pricing may be an issue," he said.

Eventually, he hopes that more players will move in to guarantee infrastructure bonds from other companies, and an infrastructure bond market will develop in India, for both domestic and international investors to participate in.

"For me personally international investment is the final aim. You've got to begin with the details but only if you have a dream. You start here and go to the moon. There is cash out there, looking for a home, but not in a hurry and not recklessly. So if we have some fundamentals in place I believe that international players would look at India with keen interest," he said.

A long way off

Commentators argue that while the development is certainly a positive, the scale of the project is too small to have any material impact, except on a few companies.

"Maybe it will really help certain issuers whose lines are blocked with banks and who need money desperately. So for them they will not say that it is a small amount, for them it will be a large amount," said one head of DCM at an Indian bank.

"For the guy who is getting the money it is helpful, but there are 30 or 40 guys who need the money. I feel whenever the ADB comes and does something with local currency bonds they say it will be a great thing to develop your market. In 2004 the ADB did a rupee bond issue and I do not see any development in the market just because of that," he added.

Compared to the total Indian rupee bond market, which is worth around US$36 billion, the US$128 million facility looks relatively small. But Miranda and others point out that things like this need to start somewhere, and the current scheme is a pilot run.

"India [is] where we thought we could pilot first. The lessons that we learn we will share with other countries and companies," he said.

"I understand the procedure takes a lot of time and at least they are doing something. It's a very interesting development and a good thing for the particular issuers and for investors to get access to credit, but in the bigger scheme of things it's not really a big deal," said the head of DCM.

Others are more positive on the likely impact of the scheme. Tarun Bansal, India analyst at Fitch, agreed that compared to the requirement the scheme is very small, but that every little helps.

"A credit announcement in the infrastructure sector is very much needed and it does help issuers come into the bond market, so that is a welcome thing. The banks can be taken out [of the equation] through a bond, so it would help improve the sector exposure issues which banks are facing," he said.

"For example a lot of banks are not willing now to lend to the power sector so if some of the operating power projects can be funded through this scheme that might be one of the options," he added.

According to Miranda, if the partial credit guarantee scheme is successful, he will look to share ideas with other possible guarantors in India, as well as in other countries.

"I think it's replicable but there are certain conditions that need to be put in place, from both the demand and the supply side. When you apply both supply and demand criteria then you see a matrix of countries with very high, medium and low potential," he said.

"We see potential in the middle income countries. Indonesia, of course China, Malaysia, maybe Vietnam at some point, Sri Lanka is fast coming up. In selected cases they would have to work on a few things. This is for brownfield projects, but one day we're going to have to shift into the greenfield projects and when you are into this space, the deals may be more selective but the countries may not be so selective," he added.