Mumbai: IL&FS Financial Services Ltd, a unit of Infrastructure Leasing & Financial Services Ltd (IL&FS), is looking to raise $200 million by selling masala bonds by September, said a top official at the company.

Masala bonds, which are rupee-denominated bonds issued overseas, have been attempted by a number of companies in recent months but the higher cost of raising funds via this route has prevented any of these issues from closing. Masala bond financing has proved to be more expensive as the currency risk is borne by the investor and hence priced in to the cost of funds.

IL&FS Financial is aware of these challenges and is willing to pay a slightly higher cost in order to establish a benchmark and diversify sources of funding, said Ramesh Bawa, managing director and chief executive officer of the company in an interview on Monday.

“To support our infrastructure programme, IL&FS Financial Services is trying to do a masala bond with an issue size of $200 million by September. This is being done to diversify sources of financing even though in the initial tranches the cost of funds raised through masala bonds may be marginally higher than domestic funding costs," said Bawa.

The proposed masala bond issue is part of a wider programme at IL&FS Financial Services to expand overseas sources of funds at a time when domestic funding for the infrastructure sector has slowed to a trickle.

Domestic banks, saddled with bad debt (in large part from the infrastructure sector), have turned cautious on lending to infrastructure firms. According to Reserve Bank of India’s December 2015 financial stability report, five sectors—mining, iron & steel, textiles, infrastructure and aviation constituted more than half of the stressed advances in the sector. At the same time, infrastructure funding through the bond markets has been tough since not many infrastructure developers have high credit ratings.

“Under the current environment, where most of the domestic banks and financial institutions have almost a neck level exposure in the infrastructure, we are left with no choice but to start raising money in overseas markets," said Bawa.

The funds raised in the overseas markets will be used for projects in markets like Europe, the Middle East, South Africa and the Philippines and for refinancing domestic loans.

IL&FS Financial intends to refinance existing debt up to $1 billion in the overseas markets and has a formal understanding with ICBC (Industrial and Commercial Bank of China) for some of this refinancing. In addition, the company will also raise fresh external commercial borrowings (ECBs) of at least $500 million during the year.

“We have tied up with a couple of institutions in China, Japan and Taiwan for this purpose. These are syndicated and straight bank loans and at comparatively cheaper than Indian interest rates which ranges between 11-12%," said Bawa.

In March, the Reserve Bank of India eased ECB norms for the infrastructure sector, which will allow firms greater flexibility in raising overseas funds. As part of its revised guidelines, the regulator said that infrastructure companies and non-banking financial companies (NBFCs) that lend to the sector to raise external commercial borrowings (ECBs) with a minimum maturity of five years. Until then, infrastructure companies could raise only long-term external borrowings of more than 10 years. The relaxed provisions, however, come with a caveat that such borrowings must be fully hedged, which may make it expensive for companies to raise funds overseas.

Over the last few years, the difference between the cost of overseas borrowings (including hedging cost) versus domestic borrowing for infrastructure assets has substantially reduced, said Ashish Agarwal, director, infrastructure at investment bank Equirus Capital Pvt. Ltd.

“This is mainly due to increasing hedging costs, particularly in the case of infrastructure loans which are long tenor-ed. This, coupled with downward trend in rupee interest rates has reduced the attractiveness of ECB borrowing for infrastructure asset owners. In fact, the recent trend has been more of refinancing of ECBs with rupee term loans— with domestic debt now being available for much longer tenor and at competitive costs as against ECB," Agarwal said.

Apart from increasing focus on overseas borrowings, Bawa said the company will also continue to monetize assets in India. Last year, IL&FS had flirted with the idea of a merger with Ajay Piramal-led Piramal Enterprises Ltd but the deal did not fructify due to delays in approvals from shareholders. As such, the group is now focussing on unlocking value from domestic assets.

The firm proposes to raise $700-$900 million through infrastructure investment trusts (InvITs) for its roads, thermal and renewable energy assets. “(We) expect to see listing of at least one infra investment trust this year. These trusts will largely be marketed to institutional investors and early indications hint that there is strong demand for the product," said Bawa.

Bringing in equity partners for individual projects is on the cards as well. Group company IL&FS Transportation Networks Ltd (ITNL) is in advanced talks for the sale of a majority stake in two of its annuity-based road assets, Mint reported on 29 April.

In March, the firm sold IL&FS Trust Co. Ltd to Vistra Group and also divested 49% in wind energy business to Japan’s Orix Corp, which has been has been a significant shareholder in IL&FS since 1993. “The IL&FS special focus is nowadays on the solar power, renewable energy and the transportation sector,’’ said Bawa.

To be sure, such sales in the infrastructure sector have not been easy.

A number of companies in the roads and renewable energy sectors are trying to attract long term financial investors such as pension funds, sellers far outnumber buyers. “It is very tough for companies to unlock capital from non-distressed assets. Right now the market is in no mood to give premium valuation for good assets. With InvITs too, the challenge for companies has been getting good valuation," said Maybank Kim Eng Securities analyst Anubhav Gupta.

“It will take some time before investors take note of good assets. There needs to be enough liquidity in the system and enough demand, and the investment environment needs to be conducive for such instruments. Everybody is waiting for that."

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