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New Delhi: The Asian Development Bank (ADB) will provide partial guarantees to rupee-denominated bonds sold by Indian companies, a move that is likely to attract investments from insurance and pension funds in the infrastructure sector and lower the cost of funds for companies.

The $128 million-bond-guarantee facility, developed jointly with the India Infrastructure Finance Co. Ltd, will help improve the credit rating of infrastructure projects and help them access cheaper funds.

Most infrastructure projects are currently rated at around “BBB-". An ADB guarantee will encourage investment by pension and insurance funds that were unable to invest until now due to low credit ratings.

The Planning Commission has projected an investment of $1 trillion in infrastructure development during India’s 12th Five-Year Plan (2012-17).

This facility will help replace existing bank loans with bond financing, said Vivek Rao, senior finance specialist at ADB’s South Asia department.

“The cost of bank funding is going up. The facility will support private sector bond offerings, mainly PPP (public private partnership) projects in roads and power sector," he said.

Banks are now the main source of funding for these projects. Asset-liability mismatches and loan exposure limits to industries set by the Reserve Bank of India, however, have made it difficult for banks to provide long-term funding even as alternative sources of investment are hard to come by.

Investments in the infrastructure space by insurance companies and pension funds are constrained by the low credit rating of the projects. Insurance companies have an estimated $300 billion in cash to invest while pension funds have around $30 billion.

The credit enhancement will free up these critical long-term resources for infrastructure investments and also deepen the bond market. ADB will charge an annual guarantee fee depending on the quantum of the credit enhancement.

“The fees will be higher when a project rated ‘BBB-’ is enhanced to ‘AA’ as compared to a project where the ratings are increased from ‘A-’ to ‘AA’," said Rao.

The GMR Group’s bond offer will be the first to benefit from the credit guarantee. “The 12.5-year bonds, expected to hit the market soon, could refinance the 320 crore of bank loans that the group has," said Siddhartha Shah, senior investment specialist, private sector operations department at ADB. The GMR group is seeking to sell the bonds to refinance a loan taken to build and operate part of a toll expressway linking Hyderabad and Bangalore.

GMR said the guaranteeing of the bond issue for the Hyderabad-Bangalore project by ADB has not been concluded yet. “However, it is a step in the right direction, and will be a boost for infrastructure financing in India," a company spokesperson said in an email response.

“We expect the market to be kick-started after the first three-five transactions. The facility can be leveraged by more than four to eight times and can support $600 million-$1 billion of infrastructure bonds," he said.

Abhay Agarwal, partner for the infrastructure and PPP practice at Ernst and Young, said making the infrastructure bond market operational would be the critical factor. “ADB’s experience of bond markets and knowledge about pension and insurance funds should help the technical operation of the facility, but how the credit rating of infrastructure bonds improves will be crucial for creating a robust bond market in India," he said.

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