Fallout of massive tightening of global liquidity.
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With global deleveraging now becoming the rule, PE funds are no longer prepared
to commit equity in India.
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C. Shivkumar
Bangalore, Dec. 11 Debt funding for new infrastructure projects is facing
bottlenecks with private equity (PE) funds exiting from investment commitments.
Banking sources said that only the existing pipeline sanctions were being
disbursed. However, banks are not prepared to release debt funds to some
planned power projects, including ultra mega power projects. This is because
promoters have relied substantially on PE funds. PE funds, in the past, had
resorted to using leveraged buyouts. This implied using borrowed funds for
acquiring equity stakes in new projects. PE funds had committed equity funding
in some projects up to 49 per cent.
However, with global deleveraging now becoming the rule, PE funds are no longer
prepared to commit equity in India. In fact, PE fund investments in all the big
ticket projects have virtually disappeared.
Minimal risk
This is despite low operational and financial risks in power, highways and
refineries. Bankers said that in most power projects awaiting financial
closure, revenue risks are minimal. This is because the forward linkages in the
form of a power purchase agreements with the electricity boards or with
distribution companies have already been tied up, backed by bank guarantees and
assignment of buyer's revenues.
Yet, the promoters' inability to source PE funds stemmed from the massive
tightening of global liquidity. The sources said that most of the PE funds are
currently deleveraging.
"So where is the question of investments at this moment," the bankers asked.
The inability to raise equity funds now implies that debt funds would also not
be coming for the moment. This is despite some banks relaxing the debt service
coverage ratios (DSCR) for infrastructure norms. This is also because domestic
promoters are not in a position to bring large equity funds.
Currently, banks are insisting only on 1.25 times. Last year, for instance, the
DSCR applied was 1.5 times.
This ratio measures the ability of the borrower to service the debt during the
tenure of the borrowings.
Project financiers normally insist that the net operating revenues be at least
1.5 times more than the debt service payments.
As a result, the only borrowers for new projects are from state-owned
corporations that includes entities such as the National Thermal Power
Corporation, National Hydroelectric Power Corporation and refineries. Last
week, for instance, the Indian Oil Corporation had raised Rs 1,600 crore
through 8-year bonds at 10.7 per cent.
Power Grid also managed to raise Rs 1,000 crore through 15-year bond issues,
early this week. These bonds were entirely picked up by public sector banks.
However, for private sector projects, funding is increasingly becoming
difficult. Bankers said that some project debt-equity ratios could also be
relaxed in the coming weeks for ensuring funding availability to power projects
on a case by case basis.
"But even if the equity component is reduced, promoters will still have to
comply with the minimum DSCR," the bankers said.
http://www.thehindubusinessline.com/2008/12/12/stories/2008121251660600.htm
I keep six honest serving-men (They taught me all I knew); Their names are
What, Why, When, How, Where and Who.
-- Rudyard Kipling
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