Under the plan, IIFCL will provide a partial credit guarantee to enhance the ratings of the project bond issue, enabling the firm to raise long-term finances from insurance companies and pension funds at competitive rates.
CES facility by IIFCL, if extended to other players in the road sector, would help address funding woes in the the sector where investor interest has waned due to a variety of reasons, including delays in approvals and uncertainty on remunerative returns.
IIFCL CMD SK Goel told FE that the said transaction is for GMR J Expressways' road project at Jadcharla in Andhra Pradesh. We hope to complete credit enhancement deals worth R2,000 crore in 4-5 road projects by March-end. Transaction for the GMR road project will be finished by November 20, Goel said.
Credit enhancement facility would help GMR Group secure better credit rating, enabling the conglomerate to raise fund from insurance and pension funds, which invest money only in securities with top credit ratings.
Apart from the Jadcharla project, GMR is also planning to get some of the other existing projects refinanced under this scheme. A company spokesperson told FE, We are planning to avail the scheme for other toll projects which have completed three years of operation since the time the company had started charging the toll, such as Tindivanam Ulundurpet Road Project (near Chennai).
The move comes in wake of the decision of IIFCL taken in January 2012, when it had launched government approved CES for undertaking pilot transactions to begin with in the road sector. Asian Development Bank is also participating in this endeavour by committing to support IIFCL by providing backstop guarantee facility up to 50% of IIFCL's underlying project risk.
So far, IIFCL had in-principle approved CES facilities for two transactions. Approval for GMR project is the first formal approval. Through Credit Enhancement Scheme (CES), a lender is provided with an assurance that a borrower will honour the obligation through additional collateral or a third party guarantee. The scheme helps enhance the credit rating of the borrower who, therefore, would be able raise debt at cheaper rates.
CES will also help the project developers to raise funds at a cheaper and stable rate from the bonds market and consequently help in development of corporate bond market in India, said a senior official in the road ministry. In 2012-13 Budget, the government had announced raising tax-free bonds of R10,000 crore by IIFCL.