Mumbai: State-owned India Infrastructure Finance Co. Ltd (IIFCL) plans to guarantee bonds issued by private firms to help them earn a better credit rating and make fund raising cheaper.
IIFCL has appointed Icra Management Consulting Services Ltd, the consulting arm of credit rating agency Icra Ltd, to help with the feasibility of the proposal.
“This has been done in markets like the US and we are trying to see how it can be done here,” said R. Rajagopalan, chief general manager, IIFCL. “The plan is to provide a partial, full or a top-up guarantee for the bonds which will improve the rating.”
Infrastructure projects are usually financed through special purpose vehicles, which are not backed by the parent firms. As a result, bonds for these projects do not get high ratings from credit agencies, forcing them to pay a higher interest rate on the debt.
“If we can provide some guarantee for a fee and get these projects to AAA, then it will attract a whole lot of institutional investors towards these bonds,” Rajagopalan said.
K. Venkatesh, executive vice-president of Larsen and Toubro Ltd’s (L&T) construction division, said that if the plan is carried through, it would make financing of projects cheaper and faster. “If IIFCL can guarantee, then we can get a few basis points’ discount on the rate, though we will have to pay some fee to them,” Venkatesh said. “It will also help us in arranging the money quicker.”
L&T is India’s largest engineering and construction firm. One basis point is one-hundredth of a percentage point.
Rajesh Mokashi, executive director at Care Ratings, said that a guarantee by government-backed firms such as IIFCL would automatically improve the ratings of infrastructure projects and ensure that funds flow in easily.
“The Indian market is dominated by companies having an AA or an AAA paper, and an IIFCL guarantee will ensure the money is there during the implementation of the project,” Mokashi said. “IIFCL not being a bank also helps because the RBI (Reserve Bank of India) does not allow banks to guarantee these bonds.”
RBI in May directed banks not to guarantee corporate bonds after State Bank of India backed a Rs4,200 crore debenture issue in that month from Tata Motors Ltd, part of which was to be used to repay debt for the purchase of the Jaguar and Land Rover brands.