Ind-Ra: InvITs To Potentially Deleverage Infrastructure Sector by around INR130 Billion in FY18

The first four infrastructure investment trusts (InvITs) which are likely to hit the primary markets in FY18 could reduce the overall debt of sponsor groups by close to INR130 billion; thereby providing cash flow relief to the beleaguered sector, says India Rating and Research (Ind-Ra). The companies which are likely to deleverage by using the InvIT route in FY18 are Sterlite Power Grid Ventures (SPGVL, 'IND A'/Stable), Reliance Infrastructure's (R-Infra, 'IND A+'/Rating Watch Negative) and IL&FS Transportation Networks' (ITNL, 'IND A'/Negative) and the recently closed issue of IRB Infrastructure Developers (IRBIDL, 'IND A-'/Rating Watch Positive).

InvITs will enable infrastructure developers to deleverage their balance sheets and refinance remaining debt (potentially INR36 billion) at lower costs. Deleveraging will provide a fillip to the coverage metrics of SPVs housed under the InvIT structures and refinancing (through bond/bank loans) and will further improve the credit profile of InvITs.

Ind-Ra had highlighted in the report 'Softened Interest Rates Likely to Brighten Solar Sector' that bank financing to the infrastructure sector has been declining, which makes it imperative for investors and developers to scout for alternate sources of funding such as masala bonds, InvITs among others. The current low interest rates regime is favourable for the bond market as well as InvITs.

InvITs would allow infrastructure developers to not only deleverage their balance sheets but also refinance remaining debt at lower interest rates. InvIT structures have robust debt service coverage ratios, and refinancing will further improve the credit profile of InvITs.

Ind-Ra has been a pioneer in rating InvITs and also has been the first to rate the first InvIT which has hit the primary market. Ind-Ra has rated both InvITs which have / are expected to hit the primary markets this month namely - IRB InvIT Fund (IRB InvIT, 'IND AAA'/Stable) and India Grid Trust (IndiGrid, 'IND AAA'/Stable).

Post issuance, Ind-Ra estimates IRB InvIT's consolidated external debt would be INR7,704.55 million on 31 March 2017. The rating on IRB InvIT is a reflection of the combined credit quality of the underlying assets. Ind-Ra expects significant deleveraging (77.5% of the INR35.13 billion debt on 31 December 2016) of the operational toll road projects post receipt of subscription proceeds, resulting in robust coverage metrics and favourable gearing. The overall operational track record of the combined portfolio (around 4.5 years) and highly fungible cash flows of InvIT structure bolster the overall credit profile. IRB InvIT's cash flows show considerable resilience to stress cases, reflecting ample cushion for timely debt servicing in potential downside scenarios. The debt infused by IRB InvIT in the SPVs shall be subordinate to the external debt and IRB InvIT shall not have a right to call an event of default under any project documents and/or any financial documents until the external debt is fully paid off.

SPGVL has floated an InvIT called India Grid Trust (IndiGrid) and is planning to hive off Sterlite Grid1 Limited (SGL1) under the trust. SGL1 holds the two operating transmission assets - Bhopal Dhule Transmission Company Limited (BDTCL) and Jabalpur Transmission Company Limited (JTCL), which are the initial portfolio assets. Subscription to IndiGrid's units will be raised in a process similar to an initial public offer for raising equity funds by companies. BDTCL plans to mobilise INR7.2bn non-convertible debentures with a tenor of five years. The proceeds from units will be used to retire the existing bank loans and promoter's sub-debt in BDTCL and JTCL. Post the issuance, SPGVL is likely to hold 15%-25% of IndiGrid, depending on the valuation/subscription by other investors.

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