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Financing renewable energy projects through bond markets in India

Perspectives
Typography
Issuances of bonds, non-convertible debentures (NCDs) included have been witnessing record volumes for past 3 years.
In FY 2017 total volume of new bond issues reached INR 6.9 lakh crore and in FY 2016 the volumes were approximately INR 4.5 lakh crore.
Long term project loans have been a traditional source of financing for infrastructure projects especially for renewable energy generating projects. Though in recent few years several bond transactions have been structured for refinancing of project loans. Bond markets are slowly emerging as a credible alternate source of financing. Enumerating some of the key advantages of bonds over term loans as-
 
Fixed rate term financing- mitigates floating rate nature of project loans for fixed priced PPA projects, often at lower than bank funding rates;
 
Proceeds can be deployed to meet varied requirements -  including refinancing of project loan, augmenting working capital, ongoing capex, share-acquisition, etc. implying ability to finance end-use over and above bank eligible end-uses;
 
Coupon payment frequency can be structured – ranging from monthly-pay to annual-pay to coupon payment at maturity. Further, the coupon rate may be at lower-rate in the initial years which step-up during the later years. Bank loans need to pay interest on monthly basis; 
 
Principal repayments can be structured differently than traditional project loan, e.g. principal servicing may be back-ended or bullet maturities. This provides project-sponsor flexibility to surplus cashflows not being repaid to bond-financier for other uses.
 
Execution timelines for bond issues may be shorter
Diversification of investor base – mutual funds, insurance companies, pension and retiral funds, corporate treasuries, foreign portfolio investors (FPIs), dedicated climate / green funds, etc.;
 
o   Internationally, dedicated green funds are growing at a stupendous rate; these are investing in ‘Green Bonds’ issued offshore, either as a USD-denominated or Rupee-denominated bonds (‘Masala’ bonds);
 
Several unique and first of its kind bond transactions have been executed in the renewable energy sector, including:
 
a)    IIFCL & ADB partial credit enhanced bond for an operating renewable power generating entity;
b)    Project bonds with typical cash-flow strapping;
c)    Corporate green bond;
d)    USD-denominated bonds by offshore holding entity to international investors and proceeds of these bonds refinancing domestic project finance;
e)    INR-denominated bonds to offshore investors, ‘Masala bond’;
f)     Bonds being issued by holding-company for equity infusion in down-stream project SPVs.
 
SEBI has recently introduced guidelines for domestic ‘green bond’ issuances.
Given regulatory interventions for deepening of the corporate bond markets combined with multiple extraneous market factors, I can say that bond markets for RENEWABLE ENERGY SECTOR are making good progress, finally!
 
JNS picture
 
Mr. Jayen Shah, CFA Head - Debt Capital Markets Commercial & Wholesale Bank
 

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