To meet the needs of a growing economy, India’s roads, ports, power plants, refineries and telecom systems require radical improvements. The demand for capital equipment and infrastructure financings cannot solely be met by the local market, and international players are eager to capitalise on this. Rebecca Spong examines the opportunities.
The Indian government estimates that at least US$320bn-worth of investment in infrastructure is required over the next five years.
There is also much scope for elements of trade finance to be used in financing the much-needed roads, ports, power stations, refineries and telecommunication systems.
Referring to these potential sectors Sonam Kapadia, head of trade finance, India and South Asia at JPMorgan, remarks: ” We look at getting involved with deals which have mitigated the construction risk or when there is a hedge available for that risk.”
He adds: “Some of the structures that we have been involved in have used elements from the capital markets which might not have been traditionally associated with trade finance.”
Indian borrowers are able to tap a range of financing instruments, ranging from the non-conventional to a traditional export credit facility. Such is the appetite among banks to take on Indian risk, particularly of those larger corporates, the borrower can be relatively specific about what kind of financing they require.
Reflecting on his latest visit to India, Asif Raza, head of trade, Asia-Pacific, at JPMorgan says: “ECAs continue to be relevant in the market but there are other alternatives that are being considered. During my recent meetings with CFOs of major companies in India, I saw this in play first hand. With one of the companies, we had detailed discussions on a transaction which was ideally suited for an Asian ECA, while with the other the transaction requirements were for non-ECA . This shows the depth of options available for structured trade transactions for Indian companies. In this environment, companies are able to push the envelope on structures.”
The financing environment is also rapidly evolving, particularly with regards to project financing and potential return of the international banking market to this sphere of business. Highlighting some of the challenges of the market, Philippe Massiani, assistant director, export finance Asia, at Calyon explains: “The other issue is that there is no project financing in India attractive to international banks – all of it is dealt with in the local market. This is partially in light of the Enron-sponsored Dabhol Power project debacle. However the market is maybe changing with some internationally-funded project deals potentially coming onto the market.”
Power deals
Referring to potential project financings in the pipeline, Massiani remarks: “We expect the Ultra Mega Power Projects (UMPPs) to be financed via a mix of local and offshore debt part of the later being supported by ECAs.”
UMPPs are part of the Indian government’s plans to build a series of large-scale power plants capable of generating 4,000MW of power. The Indian Ministry of Power, Central Electricity Authority and Power Finance Corporation (PFC) are working together to develop the nine plants, which will be built in Chattisgarh, Orissa, Gujarat, Karnataka, Andhra Pradesh, Maharashtra, and Orissa.
PFC is in charge of floating a number of special purpose vehicles (SPVs) which will take various preparatory activities at different sites, such as site selection and surveys. They will also ultimately invite bids for the projects based on competitive bidding. Then the SPVs will be transferred to the successful bidders.
The latest developments in the bidding process have seen Reliance Power win the bidding process for SPV Sasan Power, which oversaw the early development of the Madhya Pradesh project. Agreements were formally signed and exchanged on August 7.
Tata Power also announced in August the signing of an EPC contract with Toshiba Corporation for the supply of five 800MW steam turbine generators for the UMPP in Mundra, Gujarat.
These projects aim to help alleviate India’s chronic power shortages, which reach 12% at peak level, according to research conducted by JPMorgan’s Asia Pacific equity research unit in 2006. There is also huge “pent-up demand” as many Indian households do not yet have electricity connections.
India intends to add around 67,000MW generation capacity between 2007 and 2012 to address these shortages. Substantial investment is also needed to improve existing inefficient power generating infrastructure.
Fuelling the Canadian connection
Referring to JPMorgan’s research, India also needs to add around 22,000km of crude and gas pipelines over the next six years to meet with rising energy demands. “New gas finds, energy security concerns, and expansion plans of Reliance and GAIL are likely to be the key investment drivers in this space,” asserts the JPMorgan report.
One key discovery that is driving some investment into India, and in turn opening up export and trade finance opportunities, is the discovery of significant gasfields off the east coast made by Reliance in 2002. Reliance believes there are reserves of more than 14.5tn cubic feet to exploit, in what has been named the Krishna Godavari Basin (KG Block #6).
The Canadian firm Niko Resources has a 10% stake in the project.
Reliance Industries has now been tapping the syndicated debt markets to support the development of these fields. In May, it closed a 10-year US$2bn syndicated loan via 21 participating banks.
Joining the facility as a mandated lead arranger during syndication was Export Development Canada (EDC) who contributed US$100mn to the facility.
In keeping with its relatively non-traditional approach to supporting Canadian exporters, EDC decided to participate as a bank rather than as an export credit guarantor. It was partially motivated by Niko’s stake in the project, hoping to be able to leverage on this to promote Canadian exports.
Talking about EDC’s motives, Peter Nesbitt, EDC’s chief representative in New Delhi, adds: “We are aware of several Canadian firms doing business with the RIL Group and we’d like to support these relationships.”
EDC’s loan marked the second participation in a syndicated facility to Reliance Industries in 2007.
EDC has also participated in another three significant syndicated transactions in the Indian market this year supporting both Canadian exports and Indian infrastructure.
It provided US$20mn to a US$200mn syndication for Larsen & Toubro, an engineering and construction company in India. Through its participation it aimed to promote the use of Canadian technology, equipment and services in projects run by the borrower.
It also concluded a financing agreement with Tata Autcomponent Systems (Taco) to fund the import of a piece of equipment supplied by Husky Injection Molding Systems of Bolton, Ontario. The ECA contributed a further US$34mn to a five-year syndicated term loan for Hutchinson Essar and its subsidiaries. This facility aims to promote Canadian procurement opportunities in the Canadian telecom sector.
“It is about supporting an integrative trade model, and recognising the importance of investment abroad as a means of supporting exports. Our business today is more than just about supporting the flow of goods from Canada. We want our Canadian companies closer to the supply chains,” explains Nesbitt.
“From EDC’s perspective, it is increasingly about investing in trade triangles, supporting an Indian company who might need Canadian goods, services or equipment to support exports out of Indian and into a new market. For instance, the trade flows between India and South Africa are becoming interesting for EDC, and we are keen to ensure Canadian businesses can benefit from these developments,” he adds.
Last year, EDC even participated in the financing of the acquisition of the Canadian firm Teleglobe by VSNL, a subsidiary of the Tata Group. “When considering this acquisition, we analysed the plans of the Indian firm. VSNL has committed to growing this business and that’s good for Canada,” Nesbitt asserts.
Refining financing
One of the most high-profile Indian infrastructure developments is Reliance Petroleum’s US$6bn oil refinery and petrochemical complex being built in Jamnagar, Gujarat. The refinery project is due to be completed in December 2008.
The hugely popular US$2bn dual-tranche loan featuring a mixture of corporate and project financing structures was closed last October. A total of 52 banks participated, and the loan set a new record for the largest offshore facility with the longest maturity to be raised in India.
The original structure included a US$950mn 7.5-year tranche and a US$550mn 10-year tranche with a blended average life of 6.6 years. As the largest limited-recourse financing mandated in Asia, outside China, the deal represented the re-opening of India’s limited-recourse finance market, after almost 10 years of no significant cross-border participation by international banks.
The project is now also attracting the interest of export credit agencies, with US Ex-Im announcing in May it was issuing a US$500mn loan guarantee to Reliance to enable it to import US equipment, technology and services. Citi acted as guaranteed lender, and this deal brings US Ex-Im’s total exposure to India to a total of US$3.1bn.
LNG deals
JPMorgan’s research goes on to highlight India’s LNG import requirements, with the country having set a target of importing 25mn-27mn tonnes per year of LNG.
In response to this, Petronet LNG is expanding its LNG terminal in Dahej in Gujarat, with the aim of doubling production by 2009. It has just raised a US$169mn financing package via the Asian Development Bank (ADB) and Germany’s (KfW).
ADB is providing a loan of Rs6.65bn (US$169mn), and KfW is contributing 50% towards the facility. KfW does not have its own rupee funding capacity, so relied on ADB’s involvement to close this deal. ADB has previously worked with DZ Bank on rupee financings.
Steeling the deal
Export credit type financing has helped support the expansion of the Indian metals sector. Last year’s €24mn multisourced ECA-backed deal for Orissa Integrated Steel for the import of equipment is an example of how export credit can still be incorporated in Indian transactions, despite the well-known liquidity and the investment grade status of the country. With such wide financing needs, a multiple array of funding sources must still be tapped.
This transaction was arranged by MLA Calyon for the mid-cap firm Bhushan Steel and Strips, and directly involved two ECAs, although five had been involved in various other projects for Bhushan.
Under the loan structure, Italian ECA Sace provided €14mn buyer’s credit, and Finnvera provided a €10mn buyer’s credit. The other ECAs were Euler Hermes, Atradius and EKN.
Remarking on the use of export credit in India, Calyon’s Massiani says: ECA financing is often tapped but not because it is cheaper or more efficient – but because there are so many projects and borrowers need to diversify funding. However it is not the most obvious source for funding, with the local bank market being seen as their first port of call.”
ECA financing in India also throws up challenges when putting together a deal as Massiani explains: “We have to deal with the standard way of doing business in India, in that a supplier will sign a contract with the borrower, setting up LC payments. Then once the commercial contract is signed, the corporate then might opt to take ECA financing. This makes it far more cumbersome for the supplier, as it has to meet ECA guidelines. In extreme cases, the supplier might even find it difficult to collaborate and financing cannot materialise.”
Margin implications
Although there is a wealth of financing opportunities in India to support infrastructure and capital imports, the market is also known for having high liquidity and very fine pricing. This is particularly acute in the ECA market, and can make deals less inviting from the banks’s perspective.
“For the bank to ensure ECAs are kept competitive they have to lower margins; however due to constraints of OECD regulations ECAs won’t be lowering premiums. So that means 90% of the all-in costs of a deal are repaid to the ECA. In terms of margins in India, you are lucky to secure margins of around 25bp,” Massiani says.
JPMorgan’s Kapadia adds: “Pricing for Indian credits is generally very fine. There continues to be strong investor interest in Indian names and there is significant liquidity supporting the names. The investment grade rating for India had been factored into the pricing quite sometime before actually the ratings came out.”
However, as the market evolves, there are plenty of opportunities to develop new and innovative transactions. Banks are reporting a growing trend to use import financing structures. In particular, telecoms is particularly active in this area.
JPMorgan’s Raza predicts: “With changing regulations making overseas corporate borrowings more restrictive, import financing is emerging as an attractive option.”
