Fi Seek Higher Debt Service Ratio

Financial institutions (FIs) have tightened debt service coverage ratios for infrastructure projects because of the high risk associated with such financing. The high-risk perception comes in wake of promoters' reluctance to provide corporate guarantees to back the infrastructure projects.

The debt service coverage ratio reflects the repayment capacity of the project and represents the number of times the project's operating profits cover interest on loans and amortisation that fall due during the year. A high ratio indicates that the project's cash flows are above average and the promoters are in position to pay back the debt.

Institutions like the Industrial Credit and Investment Corporation of India (ICICI) and Industrial Finance Corporation of India (IFCI) have started insisting on a debt service coverage ratio of 1.5-2 for infrastructure projects. Earlier, FIs were ready to consider projects with a ratio of as low as 1.4.

In addition to tightening the debt service coverage ratio, FIs will also insist on physical asset cover of 1.5 times the value of the debt in order to completely secure term credit. ICICI's senior general manager Kalpana Morparia said, "We also need a complete escrow structure to ensure debt repayment by trapping project cash flows."

Such tight credit enhancement mechanisms have come into vogue following the poor performance of companies in certain sectors like telecom.

Companies which borrowed debt funds from the market have not been able to meet their revenue projections. Besides, the physical assets in such projects _ in some cases as low as 30-40 per cent of project costs _ barely cover the debt extended to them.

FIs are insisting on physical asset cover because a loan whose repayments are due for over two quarters technically qualifies as a substandard asset. However, if the loan is backed by physical assets, it is classified as a standard asset. They argue that assignability of project licences or concession pacts is not sufficient security for term loans because current guidelines do not include licences as security for term credits.

Given their fear of non-performing assets, FIs are not prepared to consider non-recourse or limited recourse financing for infrastructure projects. Non-recourse and limited recourse financing restricts recovery of dues _ both interest and principal _ to the project's cash flows. The promoter's assets cannot be attached under this structure.

The tightening of the debt service coverage ratio comes when banks like the State Bank of India (SBI) and institutions like the Housing and Urban Development Corporation are prepared to finance projects exclusively on a limited recourse basis without physical asset cover.

SBI, for instance, is financing the Durg bypass on project recourse basis.

The only support for the debt is a subordinated loan support by the National Highways Authority of India (NHAI). In the event of a shortfall, NHAI is expected to meet the debt service payment.

Hudco's financing of the Coimbatore bypass also on a project recourse basis without physical asset cover or corporate guarantees. It is based on studies of traffic flow. This method of financing is similar to that adopted by SBI.