State-run India Infrastructure Finance Company (IIFCL) has said it will soon launch, in association with the ADB, a product to improve credit worthiness of infrastructure firms that seek to raise money through long-term bonds.

“We are expecting government approval for launching a credit enhancement product within the next 10 days,” IIFCL Chairman and Managing Director S K Goel said here.

IIFCL will launch the pilot project by extending credit enhancement to bond issues of GMR, GVK, Reliance Power and Lanco, aggregating Rs 5,000 crore, he told newspersons on the sidelines of a meet on debt market organised by rating agency Care last evening.

“IIFCL will act as a guarantor to the bonds that will be issued by infrastructure companies. The risk in being a guarantor is the same as the risk involved in being a lender,” Goel said.

It added that credit enhancement will be of great help for greenfield special purpose vehicles which normally get only minimum ratings.

A credit enhancement product aims to enhance the quality of long-term bonds issued by infrastructure firms, thereby, making them attractive for investment. The product will see ratings of these firms go up by two notches, making them viable for investment by insurers and pension funds.

The guarantee is expected to help these companies improve their rating so that they are able to raise more funds. For instance, a B- bond may get a B+ rating after the issuer ties us for this facility with the state-run lender.

IIFCL will take charge on the fixed assets of the companies that it guarantees just as in a loan document.

Normally banks are not very keen to fund large infra projects as that will block their money for a long-term besides returns being low. Banks have been demanding RBI allow them to lend to infra projects under relaxed prudential norms.

This product may help, especially in light of the fact that government is planning a hefty $1 trillion infra investment over the 12th Plan and has admitted that unless alternate funding mechanism is identified banks alone will not be able to finance so much.

With respect to take-out finance, Goel said IIFCL has already taken 20 proposals worth Rs 3,200 crore, which is Rs 200 crore more than targeted for the year. Lenders like UCO Bank, Union Bank, Central Bank and Punjab National Bank have sent their proposals for this already.

Take-out finance refers to a financial institution taking over a credit from the original lender, and is applicable to long-term infra funding. Under this, the credit facility extended to the borrower will be borne on the books of the original lender till it is taken over.

The institution agreeing to take over on its part will have to reflect in its books this obligation as a contingent liability till it actually takes over with partial/full credit risk as agreed.

On the proposed Rs 1,200-crore tax-free infra bonds issue, he said, within the next three days they will hit the market with an ad for this. By January, the first tranche of Rs 400 crore will hit the streets. It will raise the remaining Rs 800 crore in February and March, he added.

In the last Budget, the Finance Minister had announced a new income tax section – 80CCF – entitling taxpayers to exemption on money invested in infra bonds up to Rs 20,000 a year.

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