Cos go for mini perms to beat credit squeeze
The Financial Express, April 27, 2009
Sunny Verma, Arun S
Amidst the ongoing credit squeeze, the financial community in India has found a novel way to fund infrastructure projects that need long-term loans, going up to 20 years. A clutch of leading institutional financiers has started offering ‘mini perms’, short for mini permanent loans, to finance infrastructure and commercial real estate development projects. In such a project-finance arrangement, a financier provides loans up to a particular duration, say seven years, with an understanding that at that stage the loan will get refinanced.
The idea is at the time of refinance, the strength of the cash flows of a project would be adequate for a new financier to step in, Anita Marangoly George, director (infrastructure), International Finance Corporation (IFC), told FE.
While companies can easily get refinance based on their balance sheet strength, lenders are reluctant on the project side — which are mostly executed through special purpose vehicles — until the project and its cash flows are adequate.
Mini perms help to bridge this gap in sectors such as power, commercial real estate, airports and ports. “We are starting to see that Indian companies are reluctant to tie themselves in, for example, at high rates. So they are taking five-year loans and then refinancing,” George said. Ultra mega power projects (UMPPs) that need financing for upwards of 18 years will particularly benefit from this structure.
Experts, however, note that the success of mini perms would depend on interest costs at the time of refinance. “We all need huge credit and are keen on long-term credit at competitive rates from a good source. But if mini-perm is about refinancing, not many would be keen if the interest rate is high at that particular point of time,” said NTPC Ltd CMD RS Sharma. Pointing out that NTPC has gone for refinancing earlier too, Sharma, however, said the company only goes for balance sheet-financing and not project-financing.
A UMPP requires an investment of Rs 16,000-20,000 crore. The government has so far awarded three projects—to Tata Power at Mundra in Gujarat and to Reliance Power at Sasan in Madhya Pradesh and Krishnapatnam in Andhra Pradesh.
It took almost a year for both Sasan and Mundra projects to achieve financial closure.
IFC, which loaned $450 million to Tata’s Mundra project, says it is not keen on financing any more UMPPs. Along with SBI and Macquarie, IFC has recently set up a $1-billion infra fund to pick up stakes in projects, which will also bid for greenfield projects, George said.An official of PFC, which is offering a 20-year loan with a 15-year repayment period, said the manner of servicing the debt was crucial for mini perms. The repayment period on PFC’s loan starts from six months after the completion of construction, while the interest period starts from the day the loan is approved.
According to Jaidit Brar of McKinsey & Company, it is interesting to explore new financing options but they should not adversely affect the return profile of a developer undertaking the project. Funding needs of India’s infrastructure sector are estimated at $500 billion until 2012, of which the power sector alone requires $150 billion.
The Financial Express, April 27, 2009
Sunny Verma, Arun S
Amidst the ongoing credit squeeze, the financial community in India has found a novel way to fund infrastructure projects that need long-term loans, going up to 20 years. A clutch of leading institutional financiers has started offering ‘mini perms’, short for mini permanent loans, to finance infrastructure and commercial real estate development projects. In such a project-finance arrangement, a financier provides loans up to a particular duration, say seven years, with an understanding that at that stage the loan will get refinanced.
The idea is at the time of refinance, the strength of the cash flows of a project would be adequate for a new financier to step in, Anita Marangoly George, director (infrastructure), International Finance Corporation (IFC), told FE.
While companies can easily get refinance based on their balance sheet strength, lenders are reluctant on the project side — which are mostly executed through special purpose vehicles — until the project and its cash flows are adequate.
Mini perms help to bridge this gap in sectors such as power, commercial real estate, airports and ports. “We are starting to see that Indian companies are reluctant to tie themselves in, for example, at high rates. So they are taking five-year loans and then refinancing,” George said. Ultra mega power projects (UMPPs) that need financing for upwards of 18 years will particularly benefit from this structure.
Experts, however, note that the success of mini perms would depend on interest costs at the time of refinance. “We all need huge credit and are keen on long-term credit at competitive rates from a good source. But if mini-perm is about refinancing, not many would be keen if the interest rate is high at that particular point of time,” said NTPC Ltd CMD RS Sharma. Pointing out that NTPC has gone for refinancing earlier too, Sharma, however, said the company only goes for balance sheet-financing and not project-financing.
A UMPP requires an investment of Rs 16,000-20,000 crore. The government has so far awarded three projects—to Tata Power at Mundra in Gujarat and to Reliance Power at Sasan in Madhya Pradesh and Krishnapatnam in Andhra Pradesh.
It took almost a year for both Sasan and Mundra projects to achieve financial closure.
IFC, which loaned $450 million to Tata’s Mundra project, says it is not keen on financing any more UMPPs. Along with SBI and Macquarie, IFC has recently set up a $1-billion infra fund to pick up stakes in projects, which will also bid for greenfield projects, George said.An official of PFC, which is offering a 20-year loan with a 15-year repayment period, said the manner of servicing the debt was crucial for mini perms. The repayment period on PFC’s loan starts from six months after the completion of construction, while the interest period starts from the day the loan is approved.
According to Jaidit Brar of McKinsey & Company, it is interesting to explore new financing options but they should not adversely affect the return profile of a developer undertaking the project. Funding needs of India’s infrastructure sector are estimated at $500 billion until 2012, of which the power sector alone requires $150 billion.
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