The erstwhile Planning Commission estimated a $1 trillion gap in infrastructure investment in the country that will have to be made up during the 2012-17 plan period. Roughly half of this is supposed to come from the private sector. Assuming a 75:25 debt-equity ratio, around $375 billion would have to be debt funded while $120 billion would come as sponsors’ equity.
Given the fewer funding options, a heavy burden is now placed on the banking system to meet these needs. A quick analysis of select projects shows the actual debt-equity ratio is 80:20 in many cases, since even a portion of sponsors’ equity is debt financed. This bares the extent of bank financing in infrastructure projects and the need to protect lenders’ interest.
Even to deepen the debt market and to develop a capital market for infrastructure, investor confidence will have to be boosted. For that, existing lenders’ interest will have to be protected first. Bond market cannot be seen to be a complete exit route for bank loans, but it has to coexist, be a part of the debt market and cannot be a mutually exclusive alternative to bank loans.
Though the banks have funded these projects on a non-recourse basis and no explicit support from sponsors is available to them, the banks on appraising these projects seem to have factored in a decent level of non-contractual support from the sponsors should a default occur. Looking back, it is obvious the banks placed a substantial reliance on the sponsors and oversaw even some basic project level risks. Indeed, the sponsors supported these projects in the initial phases but withdrew when they faced liquidity pressure, which the banks did not expect to happen so early, relative to the projects’ life-cycle.
The loans of many such projects are coming to the table for reschedulement or restructuring, especially toll road and thermal energy projects. Analyses reveal reschedulement/restructuring would be effective when the principal amortisation is reworked based on the cash flow, rather than postponing the amortisation schedule by a year or two.
Historical data and information on some assets classified as non-performing suggest that these assets could be re-engineered to be ‘debt-viable’ if only the repayment mode suits cash flow, with allowance for a decent ramp-up period.
For example, many bank loans for renewable assets are structured to be repaid in equal monthly or quarterly installments. Some of those assets are classified as non-regular, in terms of repayment. These are fundamentally debt-viable projects; however a readjustment of cashflow will have to be done to classify those as ‘regular’. More than as a favour to the project, the banks should see this as a chance to protect their interests. Most bank loans have a direct, plain vanilla amortisation structure with less than a year of moratorium (besides the construction period).
The banks must use this opportunity to reschedule the loans by taking taking into account the long ramp-up and seasonality of cashflow, besides adding more lender protective features, including additional reserves for debt service and additional equity from sponsors.
According to the original financing documents, any cost overruns will have to be brought in by the sponsors. However, in reality, the cost overruns (with a few insignificant exceptions) were only funded by the banks through a supplementary proposal by the sponsors requesting the banks to finance the cost overruns in the original debt-equity ratio. Therefore, it is only apt that the banks grab this opportunity to protect their interests and establish their position as a prime stakeholder to the project by reinforcing their rights.
Besides, the lenders should exercise their rights with the concession grantors by virtue of their counter-signatory status to the trust and retention/escrow agreement. In energy projects, the lenders must be recognised by the power purchase counter-parties.
The contractual structure would work for mutual benefit only if the rights and obligations of all the parties are respected and recognised. Not too sure, if the concession grantors and PPA counter-parties recognise the rights of lenders. The time has come when they cannot stay aloof of lenders’ rights. This must be consistently under regulatory surveillance. This awareness by the lenders could also help deepen the debt markets.
The author is national head-infrastructure ratings, India Ratings & Research