S5_110930 PPP Presn_Ramesh Bhujang

8/3/2019 S5_110930 PPP Presn_Ramesh Bhujang

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Infra Project Finance Financial Advisory ServicesStructured Products

L&T Infra

1

Financial Innovation

in PPP Projects

ADB Workshop in Manila, Philippines30 September 2011

L&T Infrastructure Finance Company Ltd

(L&T Infra), IndiaRamesh M. Bhujang

Vice President - Corporate & Strategic Affairs

The views expressed in these presentations are the views of the author and do not necessarily reflect the views or policies of the Asian Development

Bank (ADB), or its Board of Directors or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or

reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning

the same.


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Agenda - Financial Innovation

Meaning

Drivers

Boundaries

Some examples - Cases


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Financial Innovation - Meaning

Creation of

new investment vehicles and/ or financial structures or

significant improvement/ change of existing structures

with the purpose of facilitating increased flow of funds to a

targeted segment/ sub-segment and

customised to specific requirements of the stakeholders

(developer, investors, bankers)

Financial Innovation would necessarily be

within the existing Regulatory Framework

Financial Innovation would necessarily be

within the existing Regulatory Framework


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New financing options have evolved due to specific driversNew financing options have evolved due to specific drivers

Financial Innovation Drivers (1)

DRIVER

Perceived Interest rate risk/ view of banker/

ALM issue of banker & tenor requirement of

Risk diversification requirement of banker/ developer

Tax laws on lessor/ lessee, tax breaks on infra bonds

Financier's requirement for upside to match risk

Developer's reluctance to dilute & inability to provide

security

Contingent claims

INNOVATIVE FINANCE

Fixed/ Floating/ Interest rate Swaps

Takeout Financing

Pooling of projects / cash flows

Double dip lease/ Infrastructure bonds

Convertibles/ warrants/ Equity derivatives

Preference shares

Options - call/ put


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Financial Innovation - Drivers(2)

It may be noted that Legislations in Public Interest have also

triggered new Business Models and Financial Structuring

It may be noted that Legislations in Public Interest have also

triggered new Business Models and Financial Structuring

DRIVER

Security/ Lenders' covenants

Lower valuation by PE if developer's shares are

Public interest to reduce pollution

Public interest to conserve non-renewable resources

Steady/ stable cash flows (Power)

Fluctuating/ increasing project cash flows (Telecom.

Healthcare)

Seasonal cash flows (rain-dependent Hydropower

Marketability

INNOVATIVE FINANCE

Mezzanine/ Sub-debt

Springing lien

Carbon credits

Renewable Energy Certificates

Equal repayment

Ballooning repayment

Season-adjusted repayment schedule

Bonds (rather than loans)


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Financial Innovation has its Boundaries

Law Income Tax Act, Companies Act

Change in tax laws and Company law could end certain types of

regulatory arbitrage

Regulatory (SEBI/ TRAI/ CERC / RBI Norms)

Restrictions could reduce viability of some financial products

Accounting - guidelines/ standardsChange in reporting standards/ guidelines could change

perception of some products

Transaction costs

Laws & Regulations determine the Boundaries

ofFfinancial Innovation & Structuring

Laws & Regulations determine the Boundaries

ofFfinancial Innovation & Structuring


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Financial Innovation - Boundaries (2)

Certain types ofrefinance are considered restructuring by

regulatory auditors

Reduced viability offinancial guarantees/ credit enhancement

structures after Risk Weightages were increased from 50% to

100%

Change in tax laws have reduced viability ofleasing

Regulatory restrictions on put/ call

Change in stamp duty structures/ transaction tax/ transaction fee

etc may make certain financial products/ innovations unviable

Taxation-triggered Innovative Structures are relatively short-lived

as Regulatory Guidelines catch up within 1-2 years

Taxation-triggered Innovative Structures are relatively short-lived

as Regulatory Guidelines catch up within 1-2 years


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Example 1: Double-dip Lease (Aircraft Finance)

Driver

Some countries tax the lessor and others tax the lessee

Some jurisdictions (Europe) assign ownership and depr

benefits to the entity that has legal title to an asset, whileothers (US) assign it to the entity that has the most indicia

of tax ownership

Opportunity

There is a regulatory (tax) arbitrage available

Solution/ financial innovation

Become the lessor where the lessee is taxed and the

lessee where the lessor is taxed

An asset can end up with two effective owners, one in each

jurisdiction; this is referred to as a double-dip lease

American Airlines was the first to adopt this approach; the legalfunction generally spearheads the development of such productsAmerican Airlines was the first to adopt this approach; the legalfunction generally spearheads the development of such products


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Holdco

Example 2: Pooling - Road projects

Same Eggs, more Baskets approach -

benefit to Developers and Bankers

Same Eggs, more Baskets approach -

benefit to Developers and Bankers


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Example 2: Pooling (Road Projects)

Driver

Diversification of risk within sector

Opportunity

Bankers access to additional cash flows/ diversification

Developer securitisation at the pool level , accessing

capital market by SO bonds (pooled cash flows)

Solution/ financial innovation

Common set of lenders single larger consortium Common escrow account

Increases predictability of combined cash flows;In general, positive from a rating perspective alsoIncreases predictability of combined cash flows;In general, positive from a rating perspective also


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Tenor

Structure decided/ agreed between Bank, FI and borrower upfront

Bank can fund for 4-5 years due to ALM issues

FI s can in general fund for 10 years Together client requirement of 15 years can be achieved

Cost

Banks have lower cost of funds therefore lend at lower rates inconstruction phase, reduces IDC and thereby project cost; all in

cost to company also includes takeout fee

Lower cost is also because banks underlying risk is that of the FI

and not that of the project unconditional takeout Post construction interest rate is generally lower

Retail takeout (Bridge project in Delhi), wholesale

takeout in other road projects

Retail takeout (Bridge project in Delhi), wholesale

takeout in other road projects

Example 3: Takeout (Road/ Power Projects)


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Example 4: Structuring Repayments based on Cash Flows

Project cash flows

Repayment schedule

Time

Amount

Project cash flows

Repayment schedule

Time

Amount

Thermal power

sector - steady

cashflows (PPAbased) , therefore

equal repayment

Road/ hospital sector

- increasing cashflows

(subscriber/ patientramp-up) , therefore

ballooning repayment


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Example 4: Structuring Rbased on Cash Flows

Project cash flows

Time - months

Amount

Hydro powersector -

seasonal cashflows

(rain based), thereforestructured repayment

June-Sep

While it is logical to have repayments only during monsoon months for

rain dependent mini-hydel projects, the stipulation of comforts like 6

month DSRA etc permits a more rationalized repayment


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Example 5: LP-GP Structures: An Example

Dividend/ sale

proceeds

Holdcos

Opex

Pref Return

to LP

Surplus

GP LP

Rs. 144 cr

Rs. 4 cr

Rs. 108 cr

Rs. 16 cr Rs. 16 cr

Rs. 32cr

To be used to buyout LP stake

at par till such time 35:65 is

achieved

Return to LP: IRR 14% excl

exit premium

Holdco

(LP)(GP)

10%

(Rs. 100cr)

90%

(Rs. 900

cr)

Type LP GP Vote Pref

A 1.91 0 Yes No

B 0 1.84 Yes Yes

C 0 15.41 No Yes

D 0 0 No No

Total 1.91 17.25

Total (%)10% 90%

Pref. return

S5_110930 PPP Presn_Ramesh Bhujang

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