Road developers are finally finding takers in the domestic corporate bond market, with companies from the segment having raised Rs 23,000 crore in the eight months of this fiscal and Rs 33,000 crore in FY17 through debt issuances, up from just Rs 15,800 crore in FY16 and a negligible amount in the year before, indicates data shared by ratings and analysis firm ICRA. In contrast, the corporate bond market has grown almost two-fold since FY11, when Rs 2.2 lakh crore was raised, to Rs 6.4 lakh crore in FY17 and it saw funds amounting to Rs 4.2 lakh crore being raised in the first eight months of the current fiscal, based on data compiled by the Securities and Exchange Board of India (Sebi) from deals reported to the stock exchanges. Going by the above numbers, issuances by road project developers now account for over 5% of total funds raised from the corporate bond market. And this is likely to get bigger. Poor credit ratings have been the prime reason for a poor presence of road developers in the segment in the past. According to Anil Gupta, VP and sector head, financial ratings, ICRA, the pick-up in refinancing among road developers was due to their ability to raise long-term funds, with the projects rated at least in the AA category, barring one project rated in the A category.
Infrastructure analyst Arvind Tembhurne says corporate bonds have hardly been used for sizeable fund raising by road developers due to credit rating issues. He said of the 30-odd projects that were refinanced, either the promoters had strong ratings, such as IRB Infrastructure Developers, IL&FS Transportation Networks (ITNL), L&T and Oriental Structural Engineers (OSE), or the projects had a good operational performance and sound financial positions.
He added, “Also, most of these were annuity projects which had stable and predictable cash flows. Essentially, these are the prerequisites for a successful bond issue, but there are very few projects in the infrastructure sector, particularly in roads, that would qualify. Notably, even ITNL, which has recently been issuing corporate bonds, has done so after achieving operational status of a few of their road projects. They started in late 2015, primarily for their annuity road projects.” Gupta agreed, saying, “The pace of bond issuance will continue to be driven by the rating profile of the issuers.” He added that companies are not only looking for better rates in the current rate regime, but also to hedge against interest rate movements and to match their cash flows with their debt servicing obligations.
He explained: “A road or a power transmission project which has fixed annuity-based cash-flows can service a finite quantum of debt over the concession period. However, it can hedge its interest rate risk by raising fixed coupon bonds to match its debt repayment obligations with the annuity. Going forward, we will continue to see similar refinancing to hedge the interest rate risks as well as take long-term financing to match repayments with project cash-flows.” With road projects moving towards the hybrid annuity model, the predictability of cash flows is likely to be far better than the “operate and transfer” model, which put the risk of toll collections on the private sector developer. This shift is expected to boost the credit ratings and bankability of such projects, also making them prospective active players in the corporate bond market.
IL&FS Transportation Networks (ITNL), with one of the largest portfolio of road projects in the country, has been active, both in India and overseas. Earlier this month, the company’s board gave its nod for issuing masala bonds worth up to `2,000 crore, besides dollar-denominated bonds of up to $500 million.
Also earlier this month, the company raised $155 million (1 billion yuan) by issuing yuan-denominated bonds, popularly called ‘dim sum’ bonds, of three-year maturity. ITNL also successfully completed the largest ever issue by an Indian corporate in the CNH bond market as it priced a bond deal for CNH900 million due 2021. The proceeds will be primarily issued to refinance the existing bonds of the company.
Going by the pace of issues and a surge in bond yields, ICRA estimates the refinancing by road developers might slow in FY18 to about Rs 27,000-30,000 crore.