Fis May Relax Loan Norms For Infrastructure

Financial institutions (FIs) are willing to relax some of the covenants for term loans to infrastructure projects funded on recourse/non-recourse basis to improve loan offtake. The relaxations will depend on merits of individual cases.

Officials said lock-in provisions could be one of the covenants expected to be relaxed. Currently, there is a lock-in for 51 per cent of the promoter's equity during debt repayment period.

However, recent concession agreements for projects promoted by the Central and state governments, port trusts, municipal bodies and the National Highways Authority of India (NHAI), provide for dilution of between 26 and 33 per cent once projects enter into the operation and maintenance phase. These agreements insist on a 51 per cent equity lock-in only during the construction phase.

Infrastructure Development Finance Corporation is probably the first to have offered the relaxation.

Almost all the FIs are currently experiencing poor offtake of loans in view of some of the conditions insisted upon by them. These conditions include, physical asset cover to the extent of 150 per cent of the loan value, revenue escrow account, equity lock-in for promoters and corporate/debt service coverage ratio (DSCR) guarantees.

These conditionalities have been turning promoters away from the FIs. Increasingly, promoters have been opting for securitised debt offerings. Such offerings are made in the form of debentures through private or public placements, with revolving letter of credit-backed guarantees from foreign banks. This allows subscription from provident funds and insurance companies.

NHAI, a government agency, is one of the entities seeking relaxation in the lock-in criteria as financiers already had the first charge on revenue escrow accounts, obviating the need for a lock-in for promoters. Besides, some of the projects are to be promoted directly by NHAI through equity participation in special purpose vehicles and subsequently carrying out a phased divestment to raise resources for further investments.

State Bank of India, which is financing the Moradabad bypass project, is not insisting on any lock-in for the National Highways Authority of India (NHAI), the promoter.

Insisting on lock-in would also inhibit the ability of promoters from refinancing and foreclosing project debt through issuance of instruments like fully convertible debentures and convertible preference shares.

Foreign banks, which are prepared to either extend external commercial borrowings or provide long-term rupee loans or guarantees, do not insist on such lock-ins if projects conform to minimum DSCR requirements.

DSCR indicates the ability of a project to pay back debt. The minimum stipulated DSCR requirement

currently stands at 1.5 times of the operating cash flows.

Officials said instead of such lock-in, what was being insisted on part of the covenants is in the form of minimum DSCR requirements during the debt repayment period.

This is in the form of subordinated loans from the promoters themselves in the event of a shortfall in project revenues. Such arrangements were being facilitated to allow promoters to exit and allow for prepayment of project debt.