Improved credit profiles, long tenure key draw for investors
Infrastructure assets are becoming strong contenders for investment by bond market because of their improving credit risk profile and long-term nature.
The improvement in credit risk profile reflects the raft of policy facilitations that have helped shore up the attractiveness of Indian infrastructure sector as an investment destination by several notches.
These include more equitable risk sharing between the concessioning authorities and private developers; enhanced role of central counterparties leading to predictable payment cycles; the emergence of infrastructure investment trusts (InvITs) aiding in leverage reduction and broad-basing of ownership; and the Insolvency and Bankruptcy Code (IBC) and pre-IBC platforms facilitating faster stressed-asset resolutions.
Entities rated AAA and AA comprised ~46% of the CRISIL Ratings infra portfolio (361 companies) last fiscal, compared with ~22% (260 companies) in fiscal 2017. This is also reflected in the median ratings in CRISIL Ratings portfolio of infra assets improving from "BBB" in fiscal 2017 to "A+" in last fiscal.
Little surprise that the domestic infrastructure sectors1 have been able to attract over $74 billion foreign direct investments as per the Reserve Bank of India in the past five fiscals, including from marquee global investors such as Blackstone, Brookfield, KKR, Macquarie, CDPQ and Canadian Pension Plan Investment Board.
Says Gurpreet Chhatwal, MD, CRISIL Ratings Ltd, "The government has taken a slew of measures to address legacy issues in the infrastructure sector. Risk sharing in contracts has improved with the concessioning authorities assuming their fair share of risks, and concession agreements revised to remove bottlenecks. Now, central counterparties are playing a greater role, and the introduction of InvITs has boosted investor confidence."
Central counterparties such as the National Highways Authority of India (NHAI), the Solar Energy Corporation of India (SECI)/ NTPC, and the Power Grid Corporation of India have ensured predictability in the payment cycles, thus reducing cash-flow volatility materially. This has improved investor confidence - as reflected in the share of renewable energy projects with SECI and NTPC as counterparties expected to increase to 57%2 by next fiscal from 21% in fiscal 2019.
Also, the NHAI is contributing as much as 40% of the hybrid annuity model or HAM project cost in the construction phase, thereby significantly increasing its own skin in the game.
The IBC and pre-IBC platforms have improved the recovery prospects and resolution timelines. Besides, for operational infrastructure assets, the loss given default (LGD) tends to be lower due to long term contracts that provide revenue visibility and stability, long asset life that allows for restructuring and relative ease of change of ownership.
These developments make debt instruments of operational infrastructure assets amenable to bond market investors. Says Somasekhar Vemuri, Senior Director, CRISIL Ratings Ltd, "Currently, infrastructure segment constitutes only ~15% of the annual domestic bond issuance by volume. With improved risk profile, presence of a resolution platform and relatively stronger recovery prospects, infrastructure bond issuances can find favour with bond market investors. Given their long tenure, these can be a natural fit when it comes to investment requirements of patient capital investors."
The imminent merger of HDFC and HDFC Bank only adds to the opportunity as the group is expected to replace capital-market borrowings with sticky retail deposits post-merger. HDFC is one of the largest private-sector issuers, cornering ~8% of the bond market. After the merger, bond issuances from the combined entity are expected to trend lower than the combined issuances from the separate entities, creating a supply-side gap.
Investors can seize this opportunity and contribute to the Indian infrastructure story.