Townhall Presentation

Takeout Financing : Will it work for infrastructure?

Large Investments Over the Past Decade.but, Still a Deficit!

~US$436bn invested in infrastructure since 2003 Infrastructure investment (US$ bn)
3 3 3 3 3 3 3 3 3 3 3 3 3 3

Driving acceleration in GDP growth

3 .3 3% 3% .3 3% .3 3% .3 3% .3

3 3 3 3 3 3 3 3 3

3 3

Real GDP growth

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33

FY33 FY33 E

P wr o e:

3 % h rf ll a p a d m n ;p rc p au a ea3 %o g b la ea e 3 s ota t e k e a d e a it s g t 3 f lo a v r g % a 3it ,w hd m n go in a c p c y it e a d r w g t a3 % 3 3

P rs M jo p rs o eain a ot : a r ot p r t g t

R a s N t n la ds aeh h a saes r t h db y n m x u c p c ie o d: aio a n t t ig w y r tec e e o d a im m a a it s Tu k c v r g a ea eo r c s o ea e v r g f k p 3a3 % f t eg b la ea e m e d y( r3 o h3lo a v r g ). 3 R iwy : al a s B t c v r g a def ie c is la k g oh o ea e n f ic n y c in

,3 3 3

t a kle gho k 3 3 3 v . g b l a ea e o rc nt f m 3 s k 3s lo a v r g f /, 3m q a ea e t a s e d k /h v . C in s v r g r in p e m 3s h a r3 k /h. 3 mr 3 3

Ar ot : P n taio islo ( % f Ba ils i p rs e er t n w o 3 , 3 z r ef ie c b g n gt im r v f ic n y e in in o p o e

% f C in s % f U ) o3h a , 3 o3 S

3
3

Infrastructure Spend to Rise to ~10% of GDP

Government thrust on infrastructure spending remains strong 12th plan infrastructure outlay doubled to Rs.41tn (~10% of GDP) Private sector to contribute ~ 50% of the planned investments

Thrust on infra spending continues 12th Plan infrastructure outlay at ~10% of the GDP
(Rs trn) 3 3 3 3 3 3 3 3 3 3 3 3 3 3 V III IX X XI XII 3 33 . X XI XIII 33 . 33 . 33 . Inf rastruc ture inv es tments during plan periods 3 3 33 . 33 . 33 . Inf rastruc ture inv estments % of GDP during plan periods 3. 33

Debt requirements for private sector will see a quantum jump

Need for takeout finance

Quantum of Infra finance: Infra financing is a challenge for banking sector. Unlikely that Banks alone can finance the sector without compromising their

health given the increasing share of infrastructure in gross bank (non food) credit

Source: RBI

Need for takeout finance

Tenor of Funds Project finance, especially infrastructure project finance, requires long term

funding Long project implementation periods and long gestation period Some Infrastructure projects require 15 year, 20 year loans or even longer
Project finance creates a ALM mismatch for Banks as the average tenor of fund

source (liabilities) for the banks is 3 7 years as against long tenor assets of 15 20 years in project finance
Many banks still have policies that favor loans of not more than 10 years Infra finance can be an attractive for banks to invest if the tenure of such

lending is brought down through take-out finance

Need for takeout finance

Tapping other sources of funds Insurance, Pension Funds , PFs and Infra

Debt Funds The risk profile of a infrastructure project (for instance annuity road projects, captive power plants) change sharply after they have commissioned and have attained stability
Upon stabilisation, infra projects present

ideal opportunity for insurance companies, pension funds and provident funds which have appetites for long term assets but till now invested only 7% - 8% of their total investments in infra and social sectors.
Access to proposed Infra Debt Funds (IDF)

for PPP projects is being established on similar lines of Takeout finance scheme.

Source: IRDA Annual report, 2010

What is takeout finance

Take-out financing is a method of providing finance for longer duration projects

(say of 15 years) by banks by sanctioning medium term loans.

It is an understanding that the loan will be taken out of books of the financing bank

within a pre-fixed period (~ 5 years, when the project reaches certain defined milestones), by another institution thus preventing any possible asset-liability mismatch.
After taking out the loans from the banks, the institution could off-load them to

another bank or keep it.

On the basis of such understanding, the concerned bank agrees to provide a

medium term loan with phased redemption beginning after, say 5 years. At the end of 5 years, the bank could sell the loans to the institution and get it off its books.

What is takeout finance

Bank (Original Lender)

Repay constructio n loan Repay takeout loan from cash flows

Take Out Lender

Constructio n / Project Loan

Project Company / Borrower

Take out Loan

10

What is takeout finance

11

What is takeout finance

Two types of takeout finance possible:

A) Unconditional takeout finance

This is akin to irrevocable guarantee; take-out finance is only for principle Would agree to fund the company to repay the loan even if it were to be in

default in prior period B) Conditional takeout finance

Would agree to fund the company to repay the bank loan provided certain

conditions are met with which inter alia include:

Company is not in default to any of its lenders or creditors Total debt of the company is within limit stipulated at time of sanction of take-

out finance

12

What is holding it back

RBIs insistence that both the Lending institution and the Taking over

institution must provide for the risk capital for the loans has rendered this instrument less desirable.
Having

participated in high risk period (pre commissioning), lack of enthusiasm among banks to exit from assets which have been commissioned and attained stability.

Take out fees to be paid by lenders / borrowers availing take-out finance

reduces the attractiveness of this scheme.

It is only the unconditional take-out financing which helps lending banks to

resolve Asset-Liability mismatch.

Under conditional financing, long-term risk of the project still remains on the

books of banks until the take-out actually happens. Moreover, it is subjected to high uncertainties with respect to achievement of the project milestones at the end of defined period, which in Indian infrastructure scenario, are more often not achieved.

13

Regulatory framework
Recognized by RBI and norms exist for capital adequacy, income recognition and

provisioning
At present, conditional take out financing is subject to 100% risk weight for

provision of capital by both the entities involved simultaneously, with the take out financier using a credit conversion factor of 50% till the take out happens.
RBI has stated that exposure has to be recognized even in case of off balance

sheet transactions and accounted for using a credit equivalent. The risk weights in conditional and unconditional transfers are as per Table below:
Lending bank Unconditional takeover Conditional takeover 20% 100% Taking over bank 100% 50%

After applying a 50% credit conversion factor

14

Regulatory framework
Till recently, refinancing of domestic Rupee loans with ECB was not permitted. However, keeping in view the special funding needs of the infrastructure sector, the

ECB policy has been reviewed and a scheme has been put in place for take-out finance.
Accordingly, it has been decided to permit take-out financing arrangement through

ECB, under the approval route, for refinancing of Rupee loans availed of from the domestic banks by eligible borrowers in the sea port and airport, roads including bridges and power sectors.
Conditions for takeout of Rupee Loan by ECBs A tripartite agreement with banks and overseas recognized lenders for either a

conditional or unconditional take-out of the loan within three years of the scheduled COD. Date of occurrence of take-out should be clearly mentioned in the agreement. The loan should have a minimum average maturity period of seven years. Compliance by banks with the extant prudential norms relating to take-out financing. The fee payable, if any, to the overseas lender till take-out < 100 bps per 15

Takeout scheme by IIFCL

IIFCL shall provide 100% takeout financing to Lender(s) to the on the Scheduled Date of

Occurrence of Takeout and 75% takeout finance to 75% of residual debt; subject to total takeout amount being < 50% of the total residual debt of the project on the Scheduled Date of Occurrence of Takeout.
Tripartite agreements to be executed between IIFCL, Lender(s) and the Borrower at the time of

financial closure for new projects. Existing projects where residual loan tenor > 6 years can also be covered under this scheme
Scheduled Date of Occurrence of Takeout shall be 1 year after the scheduled COD of the

project.
Tenor of the Takeout Amount with IIFCL shall be up to 15 years - last loan repayment not to be

scheduled beyond 80% of the Project Term

IIFCL direct lending to the project shall not exceed 10% of the project cost and total lending

including Takeout Financing by IIFCL shall not exceed 30% of total project cost
Takeout will be executed in respect of only those loans, which are classified as standard

assets in the books of the Lenders

Takeout will be executed if the project has achieved an average DSCR (1 year of operation) of

at least 1.10

16

Infrastructure Debt Funds

Infrastructure debt fund (IDF) is a novel attempt to address the issue of sourcing long term

debt for infrastructure projects

IDF can be in the form of a mutual fund or a Company (NBFC) sponsored by NBFCs, or Banks IDF, shall invest primarily in the debt securities or securitized debt instrument of infrastructure

companies or infrastructure capital companies or infrastructure projects / SPVs which are created for the purpose of facilitating or promoting investment in infrastructure or PPP and post COD infrastructure projects which have completed at least one year of satisfactory commercial operation having a compulsory buyout with termination payment guarantee.
.The investors in IDF would primarily be domestic and off-shore institutional investors,

especially Insurance and Pension Funds who have long term resources. Banks and FIs would only be allowed to invest as sponsors of an IDF.

17

Way forward
Banks need to change to originate carry take out / refinance model and

align pricing with specific project level risks

Banks originate project finance loans, carry them till the project gets

commissioned and attains stability and exit either by way of refinance through either the takeout scheme or bond issue or through IDF
Banking system need to move to a stronger risk based pricing system

banks do not adequately factor in project risk at the time of lending

Pricing needs to be higher in pre commissioning period and needs to

drop significantly on achieving COD / stability in cash flow generation

Banks current pricing norms consider project risks over complete life

of the project (10- 15 years)

18

Case Study Noida Toll Bridge Co Ltd

Option to sell DDB at end of 5th & 9th year
Redemption at end of 16th year if DDBs have NOT been taken out

Public (Holders of DDBs)

Take Out Lenders (IDFC & IL&FS)

Proceeds of DDBs to fund construction

Noida Toll Bridge Co Ltd

Redemption at end of 16th year if DDBs have been taken out

Interest rate on DDBs post take-over defined but linked to performance ratios achieved by

the Project

19

Thank You !!!!

20