New Delhi: In a move that will significantly lower borrowing costs for power sector companies, India Infrastructure Finance Co. Ltd (IIFCL) may soon tie up with Power Finance Corp. Ltd (PFC) to provide credit guarantees to bond sales by these companies.
The finance ministry has approved the tie-up that will provide partial guarantees to projects across power sector generation, distribution and transmission and alternative energy projects to improve their credit ratings.
“We have given the nod to the proposal. The only condition is that the guarantee given by IIFCL should not be more than 20% of the bond issue,” said a finance ministry official, who didn’t want to be identified.
Harsh Kumar Bhanwala, the officiating chairman and managing director of IIFCL, confirmed the tie-up proposal and said a memorandum of understanding may be signed between the two next week.
“The finance minister has been trying to ensure that power sector projects get access to funds at a cheaper rate. This tie-up will help these projects get funds at lower rates. Besides conventional power projects, it will also help solar and wind energy projects,” he said. “There are a few companies that have approached us for guarantees.”
PFC chairman Satnam Singh said, “We are yet to receive a formal proposal from IIFCL.”
India’s power sector is struggling with the country’s worst shortage of fuel, including coal, causing electricity plants to run on minimal supplies. High fuel costs and low capacity utilization have increased financial stress of a number of power producers.
Beleaguered state electricity distribution companies, or discoms, are burdened by a total liability of Rs.190,000 crore. The electricity distribution companies owned by the state governments are finding it difficult to raise working capital.
Under a bailout package proposed by the Union power ministry and approved by the cabinet committee on economic affairs last year, states are to take over half the outstanding loans of state electricity boards and convert them into bonds that will be issued to the lenders and backed by state government guarantees. The lenders are to restructure the remaining 50% and provide a three-year moratorium on principal repayments.
Many distribution utilities are saddled with losses arising from theft, besides transmission and billing inefficiencies. Some regularly buy expensive power to tide over short-term deficits, and several haven’t revised rates in years. The poor financial health of these distribution firms means they cannot raise money at all.
IIFCL launched the credit-enhancement scheme for all infrastructure projects including roads earlier this year as a pilot in partnership with Asian Development Bank. But a tie-up specifically aimed at power projects is expected to improve funding for the cash-strapped sector, Bhanwala said.
Under the pilot programme, IIFCL offers a partial guarantee to bonds issued by infrastructure companies, which are generally rated BBB minus. This improves the credit rating of the project and helps it to raise funds from alternative sources such as pension funds and insurance companies rather than banks dealing with asset-liability mismatches.
The Asian Development Bank currently provides a guarantee of up to 50% of that provided by IIFCL.
Bhanwala said the option of both PFC and IIFCL co-guaranteeing the project or IIFCL providing the guarantee and PFC guaranteeing a part of IIFCL’s risk are being evaluated.
“Bulk of the financing for these projects comes from the domestic bank loan market but lately it has become very difficult for power sector projects to raise funds,” said S. Nandakumar, senior director at India Ratings and Research Pvt. Ltd.
“The other option is the bond market. But investors are not particularly enthusiastic about funding projects that are under construction. Also, most of these projects are rated below AA given the credit quality of the utilities to whom the power is sold by the power projects,” he said.
“This credit-enhancement scheme will help in improving the ratings and finding investors for the bond issuances,” he added.