Debt Markets in Infrastructure Projects

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IFM-Module2-Part 3-Debt Markets
• Debt and Equity : Order of Investment
• Debt Markets
• Fixed and Floating Rate
• Long term Markets
• Financial Institutions
• Banks
• International Markets
• Public Bonds
• Other Debt Markets
• Multiple agency
• Suppliers credit
• Role of Public Funds in Infrastructure projects

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Debt and Equity- Why Equity is required to be brought in first
• Debt are higher in Infrastructure projects
• Still Investment of Equity is required to be done prior to debt
• Seniority in payment shows Commitment of the sponsors in the
project
• financial commitment required
• Capital will flow proportionate
• Preserve integrity of financial structure
• Proportionate depending on Ratio(E/D) contribution from
both required

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Debt Market
Debt
Short Term Long term
Private
Financial
Institutes Banks
Public
Bonds
• Long gestation period
Commercial Banks
Development Banks
Foreign Banks
• Insurance Firms
• Pension Plans
Why Long term Markets needed
For Infrastructure Project
Financing
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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Debt Market
Bank Loans
• Term: Medium term (5 to
7years)
• Loan type Floating interest
rates-High
• Interest Rate Higher
• Structuring of Loans more
innovative meeting unique
requirement of projects
• Banks can provide Advisory
service:
• Viability study
• Demand
• Capital structure
• Market for loans
• Interest rates for the loans
• Preparing reports
• Tentative
• Underrate the loans
Private Loans :
• Private Debt
Insurance
• Medium to Long
terms ( 7-10yrs)
• Fixed interest
Rates
• Interest rate
:High to Medium
Public Issue of
Debt:
• Debenture
• Long term (10-
15years)
• Fixed interest
rates
International Capital
Markets
• Medium term and long
term
• Necessity when
Domestic investors cant
meet up.
• Interest rates lower then
Domestic markets
• Euro Markets-outside
India
• Raise Larger capitals
• Raise for longer duration
FIXED RATE
LOAN MARKETS
FLOATING RATE
LOAN MARKETS

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COMMERCIAL BANKS FINANCIAL INSTITUTIONS
Term/ Duration/
Tenure-LOng
Long Duration
funds available
Long time to
mature Policies are
of high duration
Type Of interest
Fixed
Term /Duration-Short
• Because Source of money Individual
depositor wherein max deposits 3 to 5
years
Developing expertize to increase term to
meet infrastructure demands
Type of interest
• Floating interest based on industry
Bench mark
• Difficult for borrowers to Hedge Interest
rates not possible for long term loan
• Hedging mechanisms not available in
market
PUBLIC
BONDS
Bonds
Usually done at
operation stage.
Save on Interest
cost
Type Of interest
Fixed
Long Term Debt Markets
LONG TERM DEBTS
PUBLICPRIVATE

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Debt Markets : Insurance Markets over Banks
• Private placement of debts dominated by insurance firms
• Long term loans as compared to bank markets
• Fixed Rate Debt Markets:
• Innovative structuring to meet the project requirement might be a
limitation.
• Different funds with insurance co like Pension plans.
• Banks provide a lot of other services-advisory underwriting, etc.

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Long term Markets: Pubic Bond vs. Commercial Banks
LONG TERM DEBTS
COMMERCIAL BANKS
FINANCIAL INSTITUTIONS
LEAD TIME –Minimum
PROCEDURAL COST-Less
Legal Compliance-Mutual
Interest :
Have Flexibility of withdrawing
funds on a time line
Not surplus capital
Evaluated as the funds
withdrawn
PUBIC BONDS
Lead Time High
Markets cost More money
Legal Compliance- As per Regulatory body
Information needs –Project features not
understood,
Negative Interest arbitrage:
All capitals not required upfront
Markets cost money as many times you
approach
Interest required to be paid as money already
picked up
Need to invest surplus capital in govt bond or
other investing

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Banks
• Banks
• Commercial
• Expect Return Proportion to the risk of the investment
• Public sector-SBI, Canara bank
• Private Banks-ICICI, HDFC
• Foreign Banks-City Bank
• Non Commercial-Development banks (Objective based )
• Commercial returns not expected
• Subsidized capital from governments
• Catering to national objective
• Investment (Proportion to risk based on market)+Development
Objectives
• Eg Nabard (https://www.nabard.org/)

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Bank Loan Parameters
• Amount
• Tenure/Maturity
• Interest Rate: Fixed/ Floating Interest Rate
• Type of repayment (Principal)
• Bullet-Repayment All at a time
• Amortization- Repayment In equal installments
• Increases with maturity- Balloon repayment

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BANK CREDITS
• Term loan
• Simplest Credit facility
• Term loan of fixed period
• Specified interest term
• Repayment
• Amortizing repayment
• Balloon repayment
• Bullet repayment
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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BANK CREDITS
• Revolving credit (Like credit card)
• Certain credit sanctioned
• Valid for certain time
• Utilize the credit till you reach the credit limit
• Repay the credit and keep enjoying credit
taking
• Fresh approvals not required as in case of
term Loan
• Saves time and transaction cost
• Eg.
• Solar Power project 600 MW-3 phases
(200MW each)
• Credit facility used for 200MW
• Refinance thru some other credit facility.
• Enjoy fresh credit limit
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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BANK CREDITS
• Stand by letter of credit
• Comfort to lender
• Provided by banks or other
agency
• If project finance co delays in
repay then bank will repay the
loan
• Certain amount of fees paid to
banker for this letter
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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BANK CREDITS
• Bridge Loan
• Delay in getting capital in one
source .
• Short term gap filling
• Loans sanctioned may take
time to arrive but the
requirement of capital has
arrived
• Usually Sectioned by bank
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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BANK CREDITS
• Comprehensive credit facility
• One or more components
together
• For meeting financing
requirement in required time
frame and other conditions
Bank Credits:
• Term Loan
• Revolving Credit
• Standby letter of credit
• Bridge Loan
• Comprehensive credit facility

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International Capital Markets
• Expectation of international Investor
• International investors may not be aware of development
strategies, ground realities
• Risk Associated increases
• Economic viability needs to be established beyond doubts
• License to operate
• Confession agreement by govt. to operate
• Concession revenue agreement
• adequate enough to receive revenue to service requirement of
the investors
• Duration of concession agreement
• Shielding Competition
• No Competence

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International Capital Markets
• Borrowers characteristic that investor will see
• Borrowing entities should be well known
• Investor will see Borrowers track record
• Established : Size, Linkage with banking world
• Creditworthy
• Is borrower familiar with markets in developing countries
• Credit rating of borrowers
• High Inflation rate in the borrowing country will reduce purchasing
power

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International Markets
• Attractiveness of the borrower country currency
• Lender will see how strong borrowing country currency
• Value of loan will be depreciated with currency lowers
• Political and economic stability of the country
• Govt change might affect economic policy
• Can borrow large amounts –International capital markets have a
lot more depth than domestic markets in emerging countries
• Longer tenure
• Large Amounts

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Bilateral agency
• AusAID -Australia,
• DFID-UK
• USAID,
• JBIC-Japanese agency
• Accompanied by clauses that involve procurement of expertise
/services from the country providing assistance.
• Interest for developing economy of their own country by exporting
equipment or expertise

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Export credit financing EXIM Banks
• Export-Import banks have been set up
to promote the export/Import of
equipment manufactured within that
country.
• Buying an equipment from US
manufacturer it is possible to get loan
from US EXIM
• Usually loan is provided for part of the
value(50-85%).
• Broader objectives to support export
in some countries.
ACTIVITY
LIST OUT
INFRASTRUCTURE
PROJECTS IN
YOUR COUNTRY
WITH EXIM BANK
SUPPORT

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Multilateral agency/ Supra national corporation
• More countries involved Capital provided by
various countries
• Loan decisions on economic development
basis rather then commercial development
• Infrastructure projects Creates
employment
• Promote socio economic growth
• Long term concessional interest rate loans
available
• Multilateral agencies are seen deterrent
against political risk as support from world
bank is strong credit as chances of projects
being on hold is removed significantly
• Helps to attract additional capital from
commercial sources reduces political risk
• Landings usually in public sector
Eg.
World Bank
IFC-INTERNATIONAL FINANCE CORPORATION
IMF-INTERNATIONAL MONETORY FUND
ADB- AFRICAN DEVELOPMENT BANK
ADB –ASIAN DEVELOPMENT BANK
IADB-INTER AMERICAN DEVELOPMENT BAK

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Supplier Credits: Getting Private Finance from suppliers of equipment
How Vendors facilitate the loan approvals or financing for their product:
• This financing Happens much before Financial closure
• Vendor Provides Loan to buy the equipment
• Lease the equipment –Lease rentals
• Providing Guarantee to the banks
• Offered by vendor as a part of bid
• Vendor needs to meet his finances
• can be refinanced or sold to financial institution / commercial bank
in due course to relieve pressure on balance sheet after equipment
is in operation

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Supplier Credits: Getting Private Finance from suppliers of equipment
Why Equipment vendor helps to finance the
purchase of equipment
• Product new, No track record
• Vendor has better understanding of
technical risk of project
• to secure a contract
• to achieve new markets
• Equipment not proven in market but
vendor is sure of his project
• Bankers/Commercial lender might have
risk mindset and hence not provide loans
ACTIVITY
LIST OUT
INFRASTRUCTURE
PROJECTS WITH
DIFFERENT
SUPPLIER CREDIT
FACILITY

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Public sector Finance Characteristic
• Public sector finance is sometimes provided as
• subsidy/low interest loan
• Subsidy / Loan is often as sub ordinated basis
• Order of Repayment
• Money obtained from public sector is repaid after loans repaid
to other commercial investors
• Only after senior lender repaid

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Why Public Sector Fund needed to Support Private funds
• To Improve Project Viability
• Private sector capital alone may make project not to be viable
• Private sector is more costlier,
• To meet the return the service would have to be priced higher
• Private sector investment not adequate to meet revenue
requirement needed to service loan.
• Viability gap funding by public sector to increase returns to control
traffic tolls for highway project. If not done defeats the purpose of
infrastructure project

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Public Sector Finance in terms of Guarantees
• Public sector can also be in the form of non financial supports like
providing guarantees.
• Grant by public sector banks if need to payback the amount
• Country guarantees
• Sovereign guarantees:
• To take care of short fall
• Government insures if there is short fall govt. will back up with
resources available

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Advantage and Disadvantage of Private and Public sector Funding
• It’s a Belief that In an infrastructure project we should
have Combination
• Private sector Equity
• Public sector Debt
WHY????
Private sector participation in ownership:
• More innovative
• More efficient
• More dynamic
Public sector
• Systems makes the project run slow
• Lot of formalities
• How much max can have w/o disturbing fiscal
deficit have limitations
Debt :
• Not active required less involvement
• Needs cheaper
• Public debt cheaper
DEBTEQUITY