Credit topping to lead to lowering of Interest rates for India’s Renewable Power sector

One of the biggest issues facing the growth of India’s renewable energy power sector is the high interest rates and massive financing issues related to building of 175 GW of RE capacity. This would require almost $150 billion in financing, most of which will have to come through debt. Most of India’s banks are facing huge issues due to non-performing loans from the infrastructure sector. So not only are interest rates high, but getting loans is also tough for India’s renewable energy developers. The government has been trying to ease this issue through different means. It has been tying up with international financial institutions to provide capital to India’s RE sector. Many of these organizations such as ADB, KFW and JICA have pledged a substantial amounts to India’s RE sector.

This initiative already has started to help the sector, with credit enhancement schemes by IIFCL seeing refinancing by top RE developers such as Renew Power and Hindustan Power (Moser Baer). These companies have managed to lower their interest rates thanks to the partial loss guarantee taken by IIFCL in association with ADB.

Here is the scheme which is applicable to infrastructure projects in India:

Regular Credit Enhancement Scheme of IIFCL

1. Title

1.1.   The scheme would be known as “Credit Enhancement Scheme” for viable infrastructure projects and would come into force from the date of this scheme’s approval by the Competent Authority.

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2. Eligibility

2.1.   Credit enhancement Scheme would be extended to commercially viable infrastructure projects which satisfy the following:

2.2.   The infrastructure project should be from the infrastructure sectors as defined under SIFTI.

2.3.   The minimum stand-alone credit rating of the infrastructure project / Proposed Bond structure to be credit enhanced should be at least BBB.

2.4.   The amount raised by way of credit enhanced bonds shall be used only to repay the existing debt partially or fully.

2.5.   The infrastructure project should have achieved COD / provisional COD as on the date of extension of Guarantee/Credit Enhancement by IIFCL.

3. Extent of Credit Enhancement

3.1.   IIFCL can extend partial credit guarantee to the extent of 20% of Total Project Cost (up to 40% of Total Project Cost with a backstop guarantor/risk sharing partner).

3.2.   However, total exposure of IIFCL will be a maximum of 20% of the Total Project Cost including exposure by way of direct lending.

3.3 However, the extent of guarantee / credit enhancement extended by IIFCL to any infrastructure project for its project bonds shall be limited to the extent which enhances the credit rating of the project bonds to its desired credit rating (minimum AA rating) subject to a maximum of 50% of the total amount of Project Bonds issued.

4. Nature of Credit Enhancement

4.1.   IIFCL will provide credit enhancement by way of unconditional and irrevocable partial credit guarantee to enhance the credit rating of the proposed bonds.

5. Security

5.1.   Investors to the project bond will have pari-passu charge, on the assets of the project bond Issuer, with other senior lenders in the project, if any. IIFCL will have a charge, which may be subordinated to the project bond Investors and other senior debt lenders. However, IIFCL will have pari-passu charge to the extent of invoked guarantee on either acceleration of the Project Bonds and/or termination of the concession agreement and/or enforcement of security after paying its obligations under the Guarantee.

5.2.   In addition to above, IIFCL to explore securing corporate guarantee/undertaking/personal guarantee from the sponsor/holding company/promoters or any other form of security to secure its exposure.

 6. Risk Sharing / Backstop Guarantee

6.1.   IIFCL may enter into risk sharing agreements with Asian Development Bank/ World Bank / other institutions including domestic banks and financial institutions in respect of any Guarantee / credit enhancement extended/to be extended  by IIFCL.  Risk sharing arrangements could be in the form of a guarantee, reinsurance, back stop guarantee, unfunded risk participation or any other agreements which is intended to reduce/cover/share the risk of IIFCL. Such arrangement to be entered into by IIFCL on terms based on merits & requirements of each case and shall be subject to the approval of Board.

6.2.   IIFCL may also enter into such arrangement for transactions (defined based on number of transactions or amount of transactions etc.) with any institution stated in the paragraph above.

7. Tenure

7.1.   The minimum tenure of the project bonds to be 5 years with or without a lock-in. However, the complete repayment of Bond Issue should be scheduled to happen within 85% of the Economic Life of the Project.

Source – IIFCL