Financing of

Infrastructure Project

Concepts & RBI Guideline

1. Special Purpose Vehicle.
2. Tradational financing.
3. With Recourse, Non Recourse, Limited recourse (Features).
4. Prudential Exposure Norms.
5. Asset liability management.
6. Administrative arrangement.
7. Take-out financing.
8. Liquidity support from IDFC.
9. Security Structures of SPVs.
10. Trust and Retention arrangement (TRA).
11. Guarantees
12. Inter-Institutional Guarantees
13. Financing Promoters Equity.
14. Appraisals
15. Mode of Infra Financing – BOT etc
16. PPP Projects
17. Lead Bank
18. Long Term Debt
19. Private Sector Co
20. Public Sector Co
21. Project Company
22. Project Term
23. Total Project Cost
1 . SPECIAL PURPOSE VEHICLES : (SPVS)

 Registered under CO’s Act 1956.

 Specially undertaking infra projects.
 Not act merely as a financial Intermediary.
 Bankruptcy of financial difficulties of parents / sponsor
should not affect of the financial health of SPV.
 De-risk own balance sheet From high project
leverage.
 Creates an exit option for equity investors.
 Tax Structuring.
 Lenders – Legal & Structural Separation
(Bankruptcy).
 Ring fencing From Sponsors cash Flows .
 Focused entity with a limited purpose ( Cash Flow
protection).
 Restrict additional debt issuances.
Traditional Financing
 Conventional direct financing on balance sheet
support.
 Financing of Capital expenditure
 Retained earning + Long term finance. Debt / Loan.
 Full recourse
 Lender’s look to firms entire asset portfolio, cash
flow
 Loan service.
Project Financing

 With recourse – to sponsors

 Non recourse – Recourse only to project cash flows
& project assets.
 Limited recourse – Recourse to sponsors under
certain defined circumstances. (Sponsor support
obligation)
 Sponsor group commits to provide standby support
has crystallized prior to financial closers
 In the event of any cost overruns in the project , it is
met from such standby support.

 Infra projects are characterized by large size, huge

Capital Cost, long gestation and extended pay back
period and high leverage ratios.

 The approach is to properly identify and allocate

various elements of the projects risk to the entities
participating in the projects.
Prudential Exposure Norms.
Regulatory Norms fixed by RBI
 Better Risk Management

 Avoidance of concentration of Credit risk

Infra others
 Single borrower 20 15
Group of borrowers 50 40
 Banks Capital Funds – Capital + Reserves

 Not applicable in the case of public sector

units
 Computation of exposure
Fund based, non fund based, Loan against
FDs, Derivatives, Investments.
Asset liability management.

 Long term financing of projects

 Asset liability mismatch
 Not in Conformity with the maturity profile of a
banks liabilities.
 Adhere to ALM Guidelines of RBI to avoid
Liquidity mismatches
Administrative Arrangements.

 Timely & adequate availability of credit is the

Pre-requisite
 Banks to avoid delay
 Procedure for approval of Loan Proposals.
 Institute a suitable monitoring mechanism for
reviewing application pending beyond the
specified period.
 Multiplicity of appraisal
 Broadly accept technical parameters laid
down by leading public financial institution.
 Ongoing monitoring of the project
implementation.
 Credit disbursed is utilized for the purpose for
which it was sanctioned.
Take-out financing
arrangement
 Mechanism to avoid asset-liability maturity mismatches /
liquidity.

 Banks have arrangement with IDFC or any other FI.

 Transfer the outstanding in Banks Books on a

predetermined basis.

 IDFC/SBI devised different take out financing structure

 These products addresses liquidity, asset
liability mismatches, limited availability of
project appraisal skills.

 Developed a model agreement.

Liquidity support from IDFC.
 Alternative to take out financing
 IDFC would commit, at the point of sanction, to
refinance the entire outstanding Loan (Principal +int)
or part after an agreed period.
 Credit risk on the project will be of Bank
 IDFC will take credit risk on the Bank.
 Interest rate depend upon the risk Perception of the
BK by the IDFC
Security Structure of SPVs.

 Security Structure generally more stringent

than the normal project.
 Security package - registered mortgage
hypothecation of assets pledge of sponsors
holding in SPVs.
 Project Contracts / Documents – assigned in
favor of lending institutions
 Charge on the future receivables.
Trust and Retention
arrangement (TRA)
 Independent agent acting on behalf of
security trustee will appropriate all cash
flows.
 This is then allocated in a pre-determined
manner to various requirements including
debt servicing.
 Residual Cash flow is available to the project
company.
Guarantees

 Payment risk in some infra projects is further

mitigated by way of guarantee from the State
or Central Govt.
Inter – institutional Guarantees

 Banks are precluded from issuing guarantees

favor of other Banks/ lending institution for
the loans extended by the latter for infra .
 Primary lender in expected to assume the
credit risk and funding is not allowed not
applicable to FIS
 No General relaxation
 Keeping in view of the

a) Special features of lending

b) high degree of appraisal skills on the part
of the lenders
c) availability of resources of a maturity
matching with the project period
Banks are permitted to issue guarantee
favoring other lending institutions provided
bank issuing guarantees
 Takes a funded shares in the project at least
to the extent of 5 percent of the project cost
and undertake normal credit appraisal,
monitoring and follow up all the project.
Financing Promoters equity
 The promoters contribution towards equity capital
of the a company should come from their own
resources.
 Banks should not normally grant advance to take
up shares of other companies
 An exception may be made to this policy for
financing the acquisition of promotors share is an
existing Company engaged in Infra project subject
to following condition.
1. Bank facilities is only for acquisition of
shares of existing company providing Infra
facilities.
2. Existing promoters (foreign & domestic )
voluntarily disinvest their majority shares in
compliances with SEBI guide.
3. Companies to which loan are extended
should have a satisfactory net worth
4. Company financed and promoters should
not be defaulter to banks/FS
5. In order to ensure the borrower has
substantial stoke in the Infra company, bank
fiancé should be restricted to 50% of the
finance required.
6. Finance extended should be against the
security of the assets of the borrowing
company or the assets of the acquired
company and not against the shares of that
company the company being acquired
7. Shares of the borrower Co/ Co being
acquired may be accepted as additional
security and not as primary security.
8. Banks to ensure stipulated margin at all
time.
9. The tenor the bank loans may not be long
than 7 years. But Banks Board can make
exception
10. The financing would be subject to
compliance with statutory requirements
under section-19(2) of the Banking
Regulation Act 1949.
11. Banks financing acquisition of equity shares
by promoters should be within the
regulatory ceiling of 5% capital market
exposures in relation to its total outstanding
advances as on March 31st of the previous
year
Appraisal
 Govt. owned entities, Banks/FI’s should undertake
due diligence on the viability of the project.
 Should ensure that the individual components of
financing and returns on the project are well defined
and assessed.
 State Govt guarantee/
 Any reported arrangement with RBI or any Bank for
servicing the loan (standing instruction ) may not be
taken as of substitute for satisfactory credit
appraisal.
 Appraisal requirements should not be diluted.
 Financing Infra project through SPV, call for
appraisal skills on the part of lending
agencies .
 Appraisal requires-
a) Identification of various project risks
b) Evaluation of risk mitigation through
appraisal of project contracts.
c) Evaluation of credit worthiness of the
contracting entities, their abilities to fulfill
contractual obligations.
 Banks/ FIs may consider constituting

screening committees/ special cells for

appraisal of credit proposal and monitoring
the progress/performance of the projects.
 Often size of the funding requirement would
necessitate joint financing by banks/ FIs or by
more than one Bank under consortium or
syndication arrangements.
 Participating Banks/FIs may for the propose
of their own assessment refer to the appraisal
report prepared by the lead Bank/FI or have
the project appraisal jointly.
Modes of Infra Financing

a) BOT – Build, operate & transfer

b) BOLT – Build, operate, lease and transfer

c) BOOT – Build, own, operate & transfer

d) BOO – Build, own & operate

e) BOOS – Build, own, operate & sell

Build Operate Transfer (BOT)

 BOT is a type of project financing. BOT is

relatively new approach to infra
development, which enables direct private
sector investment in large scale infra project

 The theory of BOT is as follows

1. Build – a private company (or consortium) agrees with a

govt. to invest in a public Infra project. The Co then
secure their own finance to construct the project
2. Operate – the private developer then owns, maintains &
manages the facility for a agreed concession period and
recoups their investment through charges or tolls.

3. Transfer – after the concessionary period the Co transfers

ownership & operation of the facility to the Govt. or
relevant state authority.
 The major parties to BOT projects will usually
include
1. Govt. agency – Govt. dept or statutory authority is a
pivotal party
 Grant the sponsor the concession that is the right to build,
own and operate the facility.
 Grant a long term lease or sell the site to the sponsor.
 Govt. co-operation is critical in large projects –
approvals, authorizations, consents for the
construction & operation of the project.
 Govt. agency is normally the primary party. It will
initiate the project, conduct the tendering
process, and evaluations of tenders and will
grant the sponsor the concession & where
necessary the off take agreement.
2. Sponsor-
 Usually a consortium of interested groups - typically a
consortium group, an operator, a financing institution
which in response to the invitation by the Govt. prepare
the proposal to construct, operate, & finance the
particular project
a) Construction contractor
b) Operation & maintenance contractor
c) Financier
d) Others – insurers, equipment suppliers and
design consultant lawyers & tax advisers
Advantages of BOT

1. Govt. get benefit of private sector to

mobilize finances and use the best
management skills in the construction
operation and maintenance.
2. Private participation also ensures efficiency
and quality by using the best equipment.
3. Projects are conducted in a fully competitive
bidding situation & are thus completed at
the lowest possible cost.
Public Private Partnership (PPP)
Project
 Means a project based on a contract or
concession agreement between the govt. or
statutory entity on the one side and a Private
company on the other side, for delivering an
infrastructure service on payment of user
charges.
Lending to PPP Projects
 A project awarded to a private sector company for
development, financing, construction, maintenance
and operation through public private partnership.
 In case of PPP project, the private sector co shall be
selected through a transparent and open
competition bidding process.
 PPP projects based on standardized model
documents duly approved by the respective govt.
would preferred. Stand alone document may be
subjected to detailed scrutiny.
Lead Bank

 Financial institution (FI) that is funding the

Infra project by providing debt to an extent
not less than 25% (twenty five percent) of the
total project debt and designated as such by
an inter institutional group or consortium of
financial institution.
Long Term Debt

 Means the debt provided by the consortium

banks to the project company where the
average maturity for repayment exceeds 10
years.
Private Sector Company

 Means a company in which 51% or more of

the subscribed and paid –up equity is owned
and controlled by private entities.
Public Sector Company

 Means a company in which 51% or more of

the subscribed and paid-up equity is owned
and controlled by the central or a state govt.
jointly or severally and includes any
undertaking designated as such by the dept
of public enterprises and companies in which
majority stake is held by public sector
companies other than financial institution.
Project Company

 Means the company which is implementing

the infra project.
Project Term
 Means the duration of the contract or
concession agreement for a PPP project.
Total Project Cost

 Means
a) As estimated by the govt. / statutory entity that
owns the project
b) As sanctioned by the lead bank
c) As actually expended
 But does not include the cost of land
increased by the govt. / statutory entity.
Financial Parameters
1. Debt Equity Ratio
2.5:1 to 4:1 in exception cases
2. Promoters contribution
Not less than 15% of the project cost
3. Fixed asset coverage ratio
1.25 and above
4. Overall Debt service coverage Ratio
not less than 1.50-2.0
Interest = Earning before Interest &tax
coverage average expenses
5. Internal Rate of Return
(Post Tax)
4% over the estimated
cost of funds