Road developers, faced with shortage of finance options, are increasingly taking the infrastructure investment trust (InvIT) route to de-leverage their balance sheet and fund projects. Prominent roads companies such as IRB Infrastructure Developers, IL&FS Transportation Networks (ITNL), GMR Infrastructure and MEP Infrastructure have announced plans to launch infrastructure trusts.
There are factors which work in favour of these roads companies if they take the InvIT route to raise funds. This can be understood by considering the point at which these trusts are launched.
Most road developers don’t have much headroom left for more equity infusion in projects. Analysts said raising money though such trusts will address the issue. It functions this way -suppose a roads company has four operational projects which generate toll revenue or annuity income. The company transfers these fully-operational projects to the InvIT. After mutual consultation and analysis, the trust and the company arrive at a fair value for the projects of the InvIT. The trust gets listed and the roads company gets the equity value of the project debt and the debt owed to the banks is repaid.
The company can use the funds received from the trust to reduce debt or secure new roads projects. Also, due to de-leveraging of balance sheet, the company can access additional debt from banks at a better interest rate. In return, the trust, which gets fully operational road projects, gets revenue and pays fixed, compulsory and tax-free dividends to investors. The trust is of two types -90:10 and 80:20. The 90:10 trust will have 90% fully-operational projects while 10% will be under-construction projects.In the 80:20 type, 80% of road projects will be fully-operational and 20% will be under construction. In 90:10 trust, retail investors can invest, while 80:20 trust would see investments largely from institutional investors.
The trust earns through the toll revenue or annuity income of the road projects it entails. Analysts point out that the trust needs to generate yield in the range of 10-11% to make it viable for institutional investors such as private equity funds, banks, pension funds, debt funds and high net-worth individuals. In this, only those firms which have more annuity projects than toll projects are likely to get higher valuation as revenues on toll projects are linked to traffic growth and inflation, which can’t be predicted.
Among prominent roads companies, analysts believe IRB Infrastructure Developers will be a key beneficiary with the launch of an infrastructure trust.
Author: ET Intelligence Group
Credits ET Realty