Comparison of Asks – CvC Revised

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					“FINANCING & INVESTMENT IN ROADS &
     HIGHWAYS: THE WAY AHEAD”




           Indian Highway Sector: Key
           Financing Issues

           16 February 2012
           Abhaya Agarwal
           National Leader -PPP Practice
           Ernst & Young Pvt. Ltd, India
Indian Infrastructure –                            Available Financing Options


Avenues for financing of infrastructure projects in India are as follows :-

►   Equity Financing
    ►    Promoter Equity
    ►    Tiered Equity Financing at multiple levels
         ►   Private Equity
         ►   Emerging Finance - Mezz Finance



►   Debt Financing
    ►    Senior Debt - Terms and covenants change reflecting the economic environment




        The above financing avenues are explained in subsequent slides

                                          Page 2
Equity Financing Available – Highway Sector
                                                                    Road Equity requirement
                                                                          as per BKC
                         16

                         14

                         12

                         10
                 USD Billion




                               8

                               6

                               4

                               2

                               0
                                      Market Cap of                                                                       Estimated Equity
                                   leading Infrastructure                                                                  Requirement
                                        companies



 Market Cap as on 2nd March from Bloomberg for IRB, Gammon Infra, HCC, IVRCL, NCC, Sadbhav, Era Infra, Madhucon Projects, Gayatri Projects, Unity Infra, L&T,
 GMR Infra, JP Power, Lanco Infratech, Reliance Power & Tata Power




                                                                        Page 3
Equity Financing – Promoter Equity
►   Promoter Equity – To infuse equity funding, Promoters have traditionally
    ►   Used internal cash accruals
    ►   Raised equity through IPO listings where promoters have sought super normal valuations


►   Equity Infusion in Infra Sectors – Equity Infusion in Indian Infrastructure sectors has been
    a function of the level of maturity of the sector i.e. Indian Highway Sector has seen Equity
    infusion of USD 4 – 4.5 bn
    ►   Power and Roads have seen higher levels of equity investments as compared to other Infrastructure
        sectors


►   Project level return expectation

    Infrastructure Sector                                             Equity Returns
    Road Sector                                                           14 – 18%
    Power Sector PPA / Merchant Power                              16 – 18%/ 30 - 35%
    Port Sector                                                           15 – 18%
    Railway Sector                                                           N.A
    Airport Sector                                                        19 – 24%


                  Roads and Power have emerged as the front runners attracting maximum equity infusion from Promoters

                                                        Page 4
Equity Financing – Alternate Equity Sources
►    Tiered Financing (Private Equity) – Lately several private equity financing options have become
     available to Indian developers at multiple levels

                              ►   Investment at Parent Company Level
                                   ►    Deal Size: USD 75mn – USD 150mn
     Company
                                   ►    Sectors: Construction Companies / Construction Subsidiaries of Holding Companies (Post restructuring)
                                   ►    Exit - Through IPO


                              ►   Investment at Holding Company level
                                   ►    Deal Size: USD 50mn – USD 100 mn.
Holding Company
                                   ►    Sectors: Road/Power/Port Holding Companies
                                   ►    Exit: Through IPO


                              ►   Investment at Asset level
                                   ►    Deal Size: depends on project size ( Typically around $ 25 mn, can go upto $ 100 mn )
SPV 1        SPV 2                 ►    Sectors: Power Greenfield Assets, Road SPVs, Minor Ports
                                   ►    Exit: secondary sale/cash extraction through refinancing
Asset 1      Asset 2



►    Mezzanine Finance – Offlate this option vis-à-vis straight equity is fast emerging as the preferred
     option with both Promoters and Investors (avoids excessive dilution or valuation loss)

                       Holdco level investment and Mezz Finance is fast emerging as the preferred option

                                                              Page 5
Debt Financing Available
                                                                   250          220
                                                                                                                              185
► Incremental debt requirement in the                              200




                                                     USD billion
                                                                   150
   period FY 09-FY 12 ~ USD 185bn
                                                                   100

                                                                   50                                   35

                                                                     0
                                                                            Total Debt        Credit Extended till FY       Shortfall
                                                                         Requirement over               09
                                                                          period 2007-12


► 9% of the total lending done by banks in
   FY09 was to the infrastructure sector.                                                                               28%
                                                                   30%
► Per credit requirements uptill FY12,                             25%
                                                                   20%
   infrastructure sector will require 28% of                       15%
                                                                                       9%
                                                                   10%
   the total lending done by banks : Huge
                                                                    5%
   increase over current levels                                     0%
                                                                           Infrastrucutre credit as % of  Incremental requirement till 2012
                                                                         current total loans and advances as % of current total loans and
                                                                                                                     advances



                   Domestic credit alone unlikely to meet the funding requirement of Infrastructure sector


                                                        Page 6
Debt Financing – Policy Changes Required (1)
     Aspect                                 Observations                                    Changes Required
                                                                               1.   A well designed policy is required which
                                                                                    should deepen the bond market
                        1.   Indian Infrastructure sector has seen limited
                             instances of infrastructure SPV’s raising funds   2.   The policy may specify a limit may be
                             by issuing bonds i.e. Noida Toll Bridge                specified for banks to invest in private
                                                                                    sector bonds for the Infrastructure sector
                                                                               3.   The policy may stipulate institutions such
                        2.   LIC and GIC, as two large subscribers, evaluate
                                                                                    as IIFCL to provide added comfort for
                             bonds through stiff criteria on rating and
 Issuance of Bonds by                                                               private sector bonds to improve their
                             dividend history which makes infrastructure
     Private Sector                                                                 ratings
                             companies unattractive for them
                                                                               4.   The policy should enable infrastructure
                                                                                    companies raise bonds at competitive
                        3.   Further, the current provisions of the                 rates
                             Concession Agreement do not encourage
                                                                               5.   The policy should ensure mechanisms
                             transfer of debt from senior lenders to bond
                                                                                    whereby use of funds raised through
                             holders
                                                                                    bonds is as per the implementation
                                                                                    schedule of the project


                        1.   Banks have been prescribed a sectoral and
                             borrower cap for lending by the RBI               1.   Infrastructure projects should be
 Prudential Lending     2.   With a slew of new infrastructure projects             exempted from sectoral and borrower cap
      Norms                  primarily in the road and power sector coming          on lending. This is likely to improve the
                             up for financial closure, debt funding may get         current debt terms available to
                             constrained in view of the exposure cap                infrastructure projects substantially
                             prevalent


                                                          Page 7
Debt Financing – Policy Changes Required (2)
      Aspect                                   Observations                                        Changes Required
  Inclusion of Private    1.   (SBI alones accounted for ~40% of all                  1.   Private Sector banks to be mandated
     Sector Banks              infrastructure lending in 2008; 72% funding from            through appropriate channels to lend to
                               PSU banks)                                                  infrastructure projects

 Introduction of Loan     1.   Due to Asset-Liability mis-match, bank loans of        1.   Asset Liability Mismatch may be
Products customized for        10 yrs repayment (+ 6 months moratorium) are                corrected by providing long term
     Infrastructure            available in India. Internationally, loans are also         liabilities to banks (by offering them
                               available with 15 yr repayment periods                      longer tenure bonds)
                          2.   Equated quarterly repayments and monthly               2.   Customized products such as bullet
                               interest payments are the accepted norms                    repayments may be introduced,
                                                                                           experimentation with such projects has
                                                                                           already started
                          1.   Globally refinancing in infrastructure projects is
                               encouraged by governments;
                          2.   Although refinancing is not precluded in the
                               Indian context, repatriation of cash surplus so        1.   The system needs to be strengthened to
                               generated is difficult since this involves stringent        recognize cash repatriation needs of the
 Refinancing and cash          controls                                                    infrastructure sector and actively
      repatriation        3.   Such cash surplus from refinancing is an                    encourage measures such as Capital
                               important incentive for short term foreign                  reduction to enable the same
                               investors. The current level of controls are hence
                               adversely impacting the interest from overseas
                               investors




                                                               Page 8
Challenge of asset-liability mismatch faced by Banks for
Infrastructure projects

 RBI rules say a bank can only lend up to 15% of its capital to a single borrower and 40% of capital
 funds in the case of a borrower group. This makes lending to infrastructure companies even more
 difficult for smaller banks.

 The asset-liability mismatch problem arises due to the fact that longer duration loans required by
 the infrastructure projects need to be financed by shorter duration borrowings.

 With ALM and concentration risks, the loans are not complete reflection of the project risk and
 loan pricing controls (for liquidity shortfall and refinancing risk).

 Low deposit rates have further aggravated the situation as the depositors are unwilling to commit
 themselves to long-term maturities

 To bridge the ALM gap, bankers are also seeking permission to float long-term tax-free
 infrastructure bonds on the lines of firms such as IDFC & IIFCL




 One of the solutions to increase fund availability to the sector is to raise the foreign
 investment cap in corporate bond further and reserve the increment for investments only in
 the sector :

                                             Page 9
Our Role in the Indian Highway Sector

 We are currently assisting NHAI as financial consultants for 28 NHDP
Projects and successfully achieved Financial closure for 14

We are providing Transaction Advisory Services for Techno – Economic
Feasibility study and possible PPP Procurement of State Roads in Tamil Nadu.
This Annuity project is under KSHIP – II with World Bank Loan assistance

 We have closed some big ticket deals in the Indian Highways Sector Space
    Second Vivekananda Bridge
    Mumbai Pune Expressway (MSRDC)
   Western Freeway Sea-link
   Nagpur – Aurangabad – Sinner – Ghoti Highway Project (MSRDC)




                                 Page 10
End of Presentation
Contact: Abhaya Agarwal
Executive Director & PPP National Leader
Ernst & Young Pvt Ltd
18-20, Hindustan Times House
Kasturba Gandhi Marg
New Delhi - 110 001
(M) +91 98716 93342
(T) +91 11 4363 3060
(E) abhaya.agarwal@in.ey.com

				
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