At the core of the Indian government’s development strategy is the National Infrastructure Pipeline (NIP), which envisages Rs 111 lakh crore of investments between fiscals 2020 and 2025. For there can’t be a better spur to sustainable growth than what a comprehensive infrastructure build-out affords. But raising that much money is an onerous task even in normal times, not to mention when there is an overwhelming fiscal burden like now.
The government expects corporate bonds to contribute only 6-8 per cent of NIP investments – in line with the historical trend – and primarily through public sector issuances.
But that won’t suffice. If bond funds have to be directly channelled to individual infrastructure projects, the gap between the low risk appetite of investors and risk levels of projects needs to be bridged. For this, innovation and regulatory enablement are indispensable.
Innovations such as asset pooling, a well-capitalised Credit Guarantee Enhancement Corporation, and widespread adoption of the INFRA EL rating scale can help mobilise an additional Rs 7-10 lakh crore of infrastructure bond issuances through fiscal 2025.
It can potentially double the share of bond financing of NIP.
Pooled assets afford scale, diversification, and flexibility to structure cash flows. That can attract foreign capital, improve the confidence of bond market investors and consequently facilitate monetisation of operational infrastructure assets.
Takeout financing facilitated by pooling of assets can help banks and non-banks free up chunks of outstanding credit for fresh lending.
Pooling vehicles that can support bond issuances are:
Infrastructure investment trusts (InvITs): The combined assets under management (AUM) of InvITs and real estate investment trusts (REITs) have reached ~Rs 2 lakh crore, marking a whopping 42 per cent compound annual growth rate since the first InvIT was launched in fiscal 2018.
This was enabled by tax concessions, mandatory distribution of surplus cash flows, and restriction on investments in under-construction assets. InvITs also need a credit rating of AA and higher. That’s attractive for bond market investors.
CRISIL’s calculus shows InvITs can enable monetisation of Rs 6.5 lakh crore worth of infrastructure assets over the medium term, which can be part-funded by bond issuances of Rs 3-4 lakh crore for roads, power transmission, gas pipelines, telecom infrastructure, and renewables.
Co-obligor structures: These comprise multiple special-purpose vehicles (SPVs) of a sponsor acting as guarantor for the collective debt of all SPVs. Sponsors can form pools of select SPVs tailor-made to fit risk appetites of different investors. Such structures are being used to fund operational assets in sectors such as renewables and roads, including toll-operate-transfer bundles.
Securitisation and covered bonds: Loans to operational infrastructure assets can be securitised by lenders, just the way retail loans are packaged and sold. The presence of cash collateral to absorb losses instills confidence in investors, who can also derive comfort from well-established legal and administrative practices governing securitisation. Lenders can also explore covered bonds backed by a pool of loans where investors can enjoy dual recourse – to the issuer, and to the cover pool of loans – if the issuer’s credit quality weakens.
There are other innovations, too, which can spur bond issuances:
A well-capitalised Credit Guarantee Enhancement Corporation: This can facilitate issuances by lifting standalone credit ratings of operational infrastructure assets to levels desired by investors. Capital invested in such a corporation would have a significant multiplier effect.
INFRA EL ratings scale: This scale provides additional credit information on the expected losses (EL) over the lifetime of an infrastructure debt, thereby complementing the traditional credit rating. It enables investors to use EL, along with PD rating, and cherry-pick investments aligned with their risk appetite.
But these innovations need to be complemented by four measures to stoke demand:
One, attracting retail investors through tax rationalisation, such as capital gains tax parity between equity and debt products, promotion of exchange-traded funds, and other index-linked funds.
Two, developing market infrastructure such as credit default swaps by allowing participants to write CDS, and quickly setting up the proposed institution to provide secondary market liquidity to bonds.
Three, and perhaps the most critical, would be measures to attract foreign capital such as easing of withholding tax, and inclusion of Indian bonds in global indices to channel capital from global index funds. Foreign investors are essential to ensure high market appetite for corporate bonds, especially given the potential crowding out of domestic funds by the government’s gigantic borrowing programme.
Four, and materially important, is enhanced reporting on environmental, social and governance (ESG) factors. ESG profiling of companies are crucial facilitators to draw foreign capital. Globally, ESG-mandated AUM totaled $40 trillion as of December 2020, and is expected to touch $100 trillion by fiscal 2030.
That growing pool presents a humongous opportunity. India’s corporate bond market can tap the opportunity by setting up an ecosystem that encourages ESG adoption and assessment.
(Gurpreet Chhatwal is MD of CRISIL Ratings. Views are his own)