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Credit Enhancement of

Project Bonds and

Project Completion Risk
Guarantee Facility
July 2014
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Partial Credit Guarantee
Facility for Project Bonds
in India
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Indian Banking Sector
Over 80% of infrastructure projects financed by banks
Banks reaching prudential and headroom limits to infrastructure assets
79% of bank deposits have sub 3-year tenure, while projects have over
10-year maturity requirements
Banks typically provide floating-rate instruments; increases interest

Indian Infrastructure Sector
Private sector debt requirement estimated at over $350 billion during the
Twelfth Plan
72% of infrastructure SPVs rated BBB or A; rest: sub-investment grade
Significant constraints to expanding resource base from non-banks

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Credit Enhancement for Bonds



Project bond issuance


Counter guarantee
(up to 50% of
participating financial
institutions guarantee)

Recourse in case
of default
Project SPV
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IIFCLs credit enhancement will be in the form of a first loss guarantee.
IIFCL will pay bond holders all scheduled principal and interest
payments until the IIFCL-guaranteed amount has been fully paid out.
IIFCLs guarantee can therefore bridge temporary cash shortfalls and
temporarily avoid a payment default.
The size of the IIFCL guarantee is determined by the rating agencies
such, that a credit rating on the enhanced bond will be acceptable to
institutional investors.
As an example, to raise the stand alone project rating from A- to AA,
the IIFCL guarantee should be 20-25% of the outstanding principal
amount of the project bond;
IIFCL charges its annual guarantee fee on its guaranteed amount. As
an example, a 2% annual guarantee fee on a 25% enhancement, would
result in a 50 bps cost of the enhancement on the principal amount of
the bond.

Credit Enhancement for Bonds
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Key Benefits - Issuers
Potential to reduce effective interest rate and increase
return on equity
Increased tenor improves project viability
Fixed interest rate reduces financial risk
Fewer covenants compared to bank loans
Diversification of funding sources

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Storm Water Drainage Systems
Telecommunication (fixed network)
Telecommunication Towers
Education Institutions (capital stock)
Hospitals (capital stock)
Common Infrastructure for Industrial
Parks, SEZ, Tourism Facilities and
Agriculture Markets
Fertilizer (capital investment)
Post-harvest Storage Infrastructure for
Agriculture and Horticultural Produce
Including Cold Storage
Terminal Markets
Soil-testing Laboratories
Cold Chains

Eligible Sectors
Roads and bridges
Inland Waterways
Railway Track, Tunnels, Viaducts, Bridges
Urban Public Transport
Renewable Generation
Electricity Transmission and Distribution
Oil Pipelines
Oil/Gas/LNG Storage Facilities
Gas Pipelines
Solid Waste Management
Water Supply Pipelines
Water Treatment Plants
Sewage Collection, Treatment and
Disposal Systems

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SPVs with a minimum domestic rating of BBB or preferably BBB+
Infrastructure projects in operation for preferably 12 months

Assessment of guarantee requirements:
Rating agency will advise on percent of principal to be guaranteed to elevate rating to AA

Costs to issuer:
Market-based guarantee fee charged annually on guaranteed principal and interest;
guarantee fee expected to apportion coupon savings between issuer and guarantors
Origination expenses to include guarantors legal fees

Monitoring and other requirements:
Infrastructure project must comply with IIFCLs environmental and social safeguards
ADB and IIFCL will conduct routine credit monitoring

Subject to negotiation; bond and guarantee documentation can be prepared and bond
held until auspicious market conditions

Process and Timelines
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Transactions Under Development
Welspun Urja Gujarat Pvt. Ltd.: Issue a bond for its 15MW solar power plant at
Khirasara Village, Kutch District, State of Gujarat,

Oriental Pathways (Indore): Issue a bond for 2-Lane to 4-Lane Dual
Carriageway Nagpur Bypass (NH-7)

CLP Wind Farms: Issue a bond for its 49.6 MW wind power project at Theni,
Tamil Nadu, India

BLP Vayu: Issue a bond for its operational wind project at Kutch, Gujarat, India

GMR Jadcherla Expressways Private Limited: Issue a bond for its NH-7 road
project Bengaluru-Hyderabad
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Project Completion Risk
Guarantee Facility for
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Infrastructure investment is negatively impacted by delays and cost overruns
As of October 2013, 301 of 738 central sector projects were delayed, due to:
land acquisition, rehabilitation, and resettlement
forest and environmental clearances
funding constraints
supply of material and contractual issues
Project delays lead to mounting NPAs and stressed assets
gross NPAs and restructured advances for infrastructure increased from
INR121.90 billion (4.66%) in March 2009 to INR1369.70 billion (17.43%) in March
2013 (Source: RBI)
Problem in raising equity due to lower-than-expected returns on account of delays
The Problem
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The stress is reflected in lower project credit ratings
The power and roads witnessed the highest rating downgrades in
shift of ratings towards BBB to C/D categories over FY2012-FY2013

The Problem
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Against a target of awarding road projects of 50,621 km in FY2008-
FY2013, only 10,690 km were awarded
Delays in financial close, land acquisition, and environmental
Out of 16 Ultra Mega Power Projects, contracts for only 4 were
awarded and only 1 has become operational
Lack of clarity on coal import, forest clearances and land
acquisition delays
Out of 576 approved SEZs, only 172 are operational
The Impact
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Establish a fund (via a long term ADB loan) to provide a guarantee to the
project SPV against delays attributable to the contracting authority
In case of a delays under the concession by the contracting authority, the
guarantor will pay the guaranteed amount to the banks
Successful sovereign facilities exist in Indonesia, Mexico, Chile and
i. The product is established as an insurance whereby the project pays a
ii. The guarantee pay-outs devolve on the concessioning authority as a loan
iii. The guarantee pay-outs are treated as a take-out transaction from the
banks and the paid-out amount becomes a liability that devolves on the
project company
Risk mitigation will reduce debt and equity cost for the SPV and
compensate for the fee.

The Proposal
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Project SPV Bank(s)
mitigated by
Brownfield risk
mitigated by PCG
type structures
Project sponsors are interested in comprehensive risk solutions:
Blending sub-debt, project completion risk guarantee, PCG, etc.
Completion Risk
Completion Risk
payout by
Option III
Potential Structure
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Guarantee provided selectively
Only for unexpected risks
Well defined risks; outside the concession agreement
Risk Management Plan to be submitted when applying for guarantee
For a finite period; maximum period of 2-3 years
Commercially-priced guarantee fee

Key Aspects of Guarantee Structure
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Current Activities
Technical study on the following aspects:

1. Business plan for proposed facility
2. Size of initial corpus (ADB loan)
3. Risks and sectors to be covered
4. Maximum guaranteed amount
5. Pricing principles
6. Where to house the proposed facility
Currently proposed in IIFCL
7. Technical support required to make facility operational.

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Thank You