THE SENIOR ANALYST
basis points on the take out amount, which as per
the banks would make loans more expensive and
leave only a few takers of the scheme.
Recent changes: Realizing the need for
improvements in the proposed scheme, an
empowered committee led by the economic
affairs secretary Arvind Mayaram, recently in
September has signaled for the changes in many
issues with the scheme. Two important ones are
highlighted below
•Abolition of the ‘takeout fees’ which is 50 basis
points of the take out amount. This will reduce
the cost of funds for the project developer and
relieve him of the added financial burden.
•The new norms will also empower the IIFCL to
be the sole lender after the loans are taken out.
These changes are welcome since both
developers and banks will benefit out of this new
takeout financing scheme. While developers
benefit from the lower interest rate costs, it
addresses the issue of asset liability mismatches
for banks as discussed before. Ideally this will
lower project cost estimates and reduce the VGF
(viability-gap funding) requirement of the
developer.
C.Credit Enhancement Mechanism (CEM):
Credit Enhancement Mechanism are the
investment vehicle resorted by IIFCL (India
Infrastructure Finance company Limited) to
enhance the rating of the infrastructure project.
In this mechanism, IIFCL will provide a credit
guarantee to the underlying infrastructure asset
in order to increase its rating to a minimum of
“AA” thereby making it eligible for issuing
corporate bonds in domestic bond market.
Increasing the rating to “AA” will allow the
projects to get funding from long term investors
like PF’s fund and insurance companies which
lend only to “AA” or above rated assets as per the
regulator guidelines.
Jan 2014
Most recent example of Dabhol Power Plant
could be cited which is facing the fuel shortage.
The plant is not having enough working capital
even to fund its loan repayment. In such case the
operating asset is coming to stand still due to
financial bottleneck. The banks are facing the
problem of assets liability mismanagement due to
delay in project commissioning and lack of
working capital with the SPV’s (Special operating
vehicles).
Philosophy behind CEM: IIFCL will be rating the
infrastructure asset or get it rated by the RBI
approved rating agency and then understand the
risk assessment model of the project. On the
basis of the associated risk IIFCL will fund the
project for its outstanding debt. IIFCL also will
further obtain an insurance cover of 50% for the
risk, insured by ADB.
Guidelines: IIFCL will fund up to 40% of the
project cost, only if the project has reached its
COD at the time of granting Credit enhancement.
Moreover the project should not be below BB
grade rating at the time of credit enhancement.
Below is the table providing the guidelines
regarding the risk associated with project rating
and subsequent IIFCL guidelines.
Sr. IIFCL Credit
No. Grades Y