Infrastructure debt funds (IDFs) have been involved in almost every public-private partnership (PPP) project in the roads space in the last two years, L&T Infra Debt Fund (L&T IDF) chief executive Shiva Rajaraman tells. As a result of banks lowering their lending rates in the past year, the gap between L&T IDF’s rates and those of banks has halved to 75 basis points (bps), he says. Edited excerpts:
How has the journey been for IDFs since 2013?
IDFs have been involved in almost every refinance transaction in the road sector — PPP projects — in the last two years. In value terms, the market share of all IDFs in aggregate in road sector refinance is nearly 45%, of which L&T IDF is the largest.
Asset growth in the first two years was slow because IDF-NBFCs were permitted initially to refinance projects in the road sector only. Subsequently, the government approved the tripartite agreement for the port sector, which enabled streamlining of the process for port sector refinance. In December 2015, IDF-NBFCs were permitted to refinance sectors other than roads and ports also. That is when the IDF industry really took off. The tripartite agreement for the airport sector has not yet been approved by the government. We expect this to happen in FY18.
Roughly 65% of L&T IDF’s assets consist of long-tenure bonds, a majority of which are listed. All our borrowings are by way of issue of long-tenure listed bonds subscribed by pension/provident funds and insurance companies. We have 0% NPAs (non-performing assets) and 0% restructured assets.
How much have you refinanced?
We have completed three full years of operations and have refinanced close to 45 projects aggregating nearly Rs 5,000 crore.
What is your portfolio mix like?
Road projects, numbering 19, constitute the largest segment of our portfolio. In value terms, this is around 60% of our portfolio. All road projects refinanced by us are guaranteed by a government-owned project authority. While a majority of our road projects are guaranteed by the NHAI (National Highways Authority of India), a smaller percentage is guaranteed by a state-government owned project authority. In addition to PPP projects under NHAI, we have refinanced five road projects in Jharkhand and two in Madhya Pradesh, guaranteed respectively by the Jharkhand government and the Madhya Pradesh Road Development Corporation (MPRDC). The balance 40% of our portfolio consists of solar power, wind power and transmission projects.
By the end of FY18, would your exposure to ports rise?
In the road sector, we had a total of about 117 eligible PPP projects to refinance. As compared to this, in the ports sector, there are only 33 eligible projects for IDFs to refinance. These 33 projects are spread across all the 12 major ports. So the pool is smaller, but each project will be larger than the average size of a road project. This year we expect to refinance 3 to 4 PPP projects in the port sector.
Have you found it hard to wean quality borrowers away from banks?
Initially, we used to refinance at about 1.5% lower than the average lending rate of banks. Now that gap has narrowed because banks have lowered rates in the last six months. But, the gap is still more than 75 basis points.
We also offer longer tenures and fixed-rate solutions for the entire tenure of the debt. Borrowers’ appetite for fixed-rate solutions depends on the their assessment of whether interest rates would reduce. Around two-three years back, the general range of lending rates of banks was about 2 % higher. At that time, it did take a lot of effort to convince customers that fixed-rate debt makes sense for the long term. Fixed rates enable elimination of interest-rate risk which helps projects obtain higher credit ratings. Now that interest rates have substantially fallen, 60% of our borrowers do not expect rates to fall much further and have expressed a preference for fixed-rate solutions.
What are capital-raising plans for the year?
Our actual debt equity ratio is currently less than 6. We are permitted a maximum debt-equity ratio of 8, which means our we don’t require additional capital till we reach the debt-equity ceiling of 8.0. We have approximately Rs 800 crore of net worth, including Rs 100 crore of preference share capital. With Rs 800 crore of net worth and a debt-equity of 8, we can go up to about Rs 7,000 crore of assets without raising fresh capital.
Where do you expect to see your balance sheet by the end of FY18?
I can’t give you an exact number, but I would say 1.5-2x of the balance sheet as on March 31, 2017, about Rs 4,000 crore.