India Ratings and Research (Ind-Ra) rates India Grid Trust (IndiGrid, ‘IND AAA’/Stable), launched by Sterlite Power Grid Ventures Private Limited (SPGVL, ‘IND A’/Stable), under the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (InvIT regulations).
IndiGrid is the first InvIT to obtain a ‘credit rating’.
The rating reflects the high quality credit strengths of the underlying assets which include the firm debt service coverage ratios for external debt, strong liquidity and favourable gearing. Transmission projects of SPGVL are financed on an average with a debt equity ratio of 85:15, whereas in case of IndiGrid aggregate consolidated borrowings and deferred payments net of cash and cash equivalents shall never exceed 49% of the value of the IndiGrid assets. Also, the InvIT’s unencumbered asset (Jabalpur Transmission Company Limited: JTCL) underpinned by predictable cash flows due to the nature of availability of the transmission assets, low operational complexity, stable regulatory framework and sponsor’s experience lends strength to the rating.
Ind-Ra’s key rating factors in the analysis are the quality of assets, business objectives and the sector outlook. Major factors for assessing the quality of assets are revenue risks, complexity of operations, cost certainty and regulatory risks among others. The comprehensive analysis of the underlying infrastructure assets is based on the ‘Rating Criteria for Infrastructure and Project Finance. Business objectives and the growth plans are considered for assessing the possible portfolio build up and the effect of various types of assets in the portfolio. The sectoral outlook plays a significant role in assessing the InvIT, since the portfolios are likely to be built on one of the asset classes (power, roads or ports) and will be exposed to systemic risks. Experience of sponsor, project manager and investment manager is also considered in Ind-Ra’s analysis.
The regulatory ceiling on the gearing – (external financial obligations as a percentage of asset value) lends support to the credit profile of the InvIT. Any change in the assets’ underlying credit profile, change in regulations, new acquisitions and disposal of assets can alter the ratings of the InvIT.
InvIT: A Brief Overview
The InvIT asset class has been introduced by the central government to release the locked up funds of banks and the equity capital of the developers in infrastructure projects. InvITs also provide an opportunity to refinance the existing loans, reduce the external debt and thereby bolstering the credit strength of the underlying assets. Ind-Ra expects power, roads and ports to be the major sectors which will tap the InvIT structure.
The key features of InvITs are , compulsory distribution of 90% of net distributable cash flows on a half yearly basis in case of public placement (yearly for private placement), the cap of 49% on the ratio of external financial obligations compared to the estimated total value of the assets under InvIT, also, InvIT regulations mandate a rating on an InvIT when the aggregate borrowings and deferred payments of the InvIT (net of cash and cash equivalents) exceed 25% of the value of the InvIT assets. In case the InvIT invests or proposes to invest in any completed or revenue generated infrastructure projects, the value of which is more than 80% of the value of the InvIT assets, it shall raise funds through a public placement. Also the cap of 10% on the ratio of under construction asset compared to the estimated total asset value is applicable on the InvITs under a public placement. If the InvIT invests or proposes to invest in any under-construction infrastructure projects, the value of which is more than 10% of the value of the InvIT assets, it shall raise funds through privately placed InvITs.
The InvIT structure will have four parties namely; sponsor, trustee, investment manager and project manager. The primary responsibility of the sponsor is to setup the InvIT and appoint the trustee of the InvIT. The trustee is responsible, on behalf of the unit holders, for overseeing the activities of the project manager and the investment manager and also compliance of the trust with regard to the applicable regulations. The investment manager is responsible for investment decisions, including the new investments, disposal of existing assets and capital structure among others. The project manager has to ensure smooth operations of the assets, including maintenance activities and revenue collection. Unit holders have voting rights to approve acquisitions, disposal of assets and other major decisions.
The tax benefits of using InvIT as a capital raising avenue include, deferral of capital gains tax applicable (15%) on the sponsor for up to three years, no dividend distribution tax at the SPV level, if InvIT holds 100% in SPVs and the pass through is provided in respect of the income, by way of interest received by the InvITs from the SPV. However, Interest income received by non-resident unit holders attracts 5% tax and for resident unit holders 10%. Tax treatment will remain as a major incentive for investors opting for InvITs, since it unlocks the value of the saved taxes for the investors.
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