By Shubham Jain
Popularly recognized as InvITs, Infrastructure Investment Trusts have gained important momentum more than the last two years. The Securities and Exchange Board of India (SEBI) came out with the initial set of suggestions for such structures in July 2014 and has been consistently improvising them, based on the feedback from the stakeholders as effectively as encounter from the created markets. This has made InvITs more amenable to each lenders and investors.
Till now, assets worth Rs 1.38 trillion have been monetised by way of eight such structures, of which only 3 (~ Rs 387-bn assets) are publicly listed, which also indicates the complexity involved with such issuances, therefore generating them fairly more appropriate for the institutional investor. The road sector has been the top contributor to InvITs therefore far, followed closely by telecom towers and transmission lines.
In terms of debt issuances, the total quantity raised by InvITs is about Rs 550 bn, resulting in a loan-to-worth (LTV) of roughly about 40%, which is considerably decrease than the leverage typically seen in infrastructure projects. The low LTVs resulting in robust debt coverage indicators, coupled with structural features such as money flow pooling, asset diversification, availability of robust liquidity buffers, lends important assistance to the credit profile of InvITs, also reflected in their higher credit ratings. Further, the regulatory provisions of limiting leverage levels, mandatory money flow distribution and, most importantly, a cap on below-building projects in the portfolio, add to the stability and predictability of money flows.
With InvITs now recognised as borrowers below the SARFAESI Act, lenders to these trusts shall have sufficient statutory enforcement alternatives, the absence of which was a constraint for bankers to lend straight at the trust level earlier. Further, the IRDAI has not too long ago permitted insurers to invest in debt instruments of InvITs rated ‘AA’ and above.
InvITs had their share of initial struggle even though. This is evident from the really restricted participation in the earlier debt issuances, from only a handful of mutual funds (MFs). The paucity of demand also resulted in higher coupon/interest prices to start out with. The spread in between coupon prices for InvITs and related rated corporate bonds used to be about 125-150 bps, which has come down to a considerably more respectable level of 30-50 bps for current transactions.
An InvIT is also exposed to dangers standard of any operational infrastructure asset. Some of the prominent ones contain counterparty threat, dispute with the authorities, assumption on lengthy-term development trends, competitors from new roads/other modes, unanticipated negotiations, political threat, and capability to operate at optimum levels for lengthy periods of time. An further threat is the requirement to routinely add assets to the portfolio, which might outcome in considerable alterations in the organization threat profile. For instance, an InvIT comprising energy transmission lines adding generation assets. Further, the acquisition worth and leverage undertaken for such acquisitions can have a material effect on the monetary threat profile.
Thus, a robust governance structure and higher transparency levels will assist in taking InvITs to the next level of marketplace acceptance and enabling them to develop into the best model of asset monetisation in India. This would also be critical to assistance the massive quantity of InvITs (such as lots of from state entities) in the pipeline, with assets worth more than Rs 2 trillion, which are anticipated to be monetised inside the next one year.
In the lengthy run, all infrastructure assets with 3 to 5 years of operating track record across segments like roads, gas pipeline, digital fibre, energy transmission and renewables are best candidates for monetisation by way of this platform.
The writer is Group Head & Senior Vice President, Corporate Ratings, ICRA