Japanese lender Sumitomo Mitsui Banking Corporation (SMBC) is close to financing a second acquisition in India’s highways sector, and it is also pursuing greenfield project debt mandates in the solar commercial and industrial segment, according to two senior executives.

SMBC will prefer to lend to the roads sector through infrastructure investment trusts (InvITs), said Seth Tan, managing director of SMBC's structured finance department for the Asia Pacific region. This will be similar to its first transaction in India, in which it jointly underwrote a USD 120m debt facility with Barclays for UK-based emerging markets investor Actis' acquisition of a portfolio of six roads from Welspun Enterprises in December last year. 

"The InvIT structure potentially limits gearing, so for some assets where more debt is supportable, there is a possibility to provide more,” said Tan, adding that the Actis deal was SMBC's first syndicated toll road deal in the Asia-Pacific - excluding Australia - featuring some level of traffic risk.

After a nationwide lockdown imposed in March 2020, traffic in India rebounded quickly, resulting in toll revenue recovering to 87% of pre-COVID levels in July, Moody’s local arm ICRA said in a note, with collections registering a 10% on-year growth for the six months through March 2021. Of the 21 InvITs registered with capital markets regulator the Securities and Exchange Board of India (SEBI), 11 are in the roads sector.

“While we may need to find other risk mitigants for greenfield development - such as strong completion guarantees and appropriate engineering, procurement and construction agreements - generally, if the transaction is well-structured, SMBC will be keen,” said Tan.

SMBC currently has four people dedicated to its India business with one person in Singapore and three in Mumbai involved in deal origination and execution.

“This is currently being assessed," said Jeanne Soh, head of renewable and sustainable energy at SMBC's structured finance department for Asia. Increasing headcount will depend on deal flow, she said.

Renewables focus

SMBC, which has financed 5 GW of renewables in India in the last five years - starting in 2019 with a utility-scale portfolio - expects to finance more types of solar projects.

“There will be more financings for hybrid projects, as well as battery storage, with some element of merchant risk,” said Soh, adding that the lender expects more transactions in South and Southeast Asia in the solar commercial and industrial segment.

Deals for utility-scale solar and wind will remain limited to projects that have offtakes with federal entities like the Solar Energy Corporation of India (SECI) and generator NTPC. Two of SMBC’s portfolio projects are Project Gudadur, a 160 MW blended wind-solar farm in Karnataka state awarded to Global Infrastructure Partners-owned Vena Energy; another is Project RTC - a 1.3 GW development awarded to a joint venture between ReNew and Mitsui - comprising of 400 MW solar and 3x300 MW wind, as well as a 100 MWh battery. Both have offtake deals with SECI.

“Offtakes with the National Hydroelectric Power Corporation is something we will consider,” said Soh, adding that the only state-level counterparty SMBC is comfortable with is the Gujarat Urja Vikas Nigam (GUVNL). She did not provide details.

Of the seven state-owned power utilities that were rated A+ by India's Ministry of Power in its latest rankings published in April this year, four are under GUVNL.

While Indian public sector lenders provide the best rates, SMBC is competitive with non-bank financial companies and private sector banks, she said, adding that local public sector lenders can offer “very sharp and attractive pricing.” She did not provide details, only saying it it is tough to provide an exact range.

SMBC’s constraints in India are largely related to long-term local currency liquidity - greater than a year - as in India, the liquidity must be backed by a deposit base. For foreign banks like SMBC, the deposit base is largely short term in nature.

"Long-term funding is an area we are looking into as we continue to build our capabilities and grow our business in the Indian market," said Soh.

Opportunities also arise when developers with big project pipelines do not want to rely solely on local lenders.

“There are foreign sponsors, some of whom may want to expand their pool of liquidity beyond local banks or they deal with us because of an existing relationship,” said Soh.

The deal to finance Actis’ acquisition of Welspun's roads portfolio in India was because of an existing relationship with SMBC from a deal in Bangladesh, she added.

ICRA Vice President and Sector Head-Corporate Ratings Vikram Reddy V says the cost of funding is relatively cheaper for foreign banks compared with Indian private sector lenders.

Indian lenders offer rates of about 9-10% for construction-stage projects and between 8.5% and 9% for operational ones with healthy credit profiles, said Reddy. For a portfolio reviewed by ICRA, the extent of variation for loans from foreign lenders in relation to Indian banks was 50-75 basis points for entities with strong credit profiles, he added.

The acceptance of Indian renewables projects for all stakeholders has increased over the last two to three years with the continued strong policy support of the central government and a track record by developers in building and operating assets, said Vikram.

The government has demonstrated its support by introducing a policy requiring all distribution companies to source a minimum amount of their power from renewables. This provides visibility for capacity addition, said Reddy, adding that the government has also announced rules for energy storage to encourage development of storage projects. The policy requires that the total energy consumed from solar and/or wind, with or through energy storage should gradually rise to 4% by 2029-2030.

The government has also announced a schedule for bidding out renewables projects to achieve its target of 500 GW of installed electricity capacity from non-fossil sources by 2030 from 169 GW currently. 

Deal flows and financing

There are at least two large portfolio transactions ongoing in India's roads sector, with private equity major Kohlberg Kravis Roberts (KKR) the preferred bidder for the sale of a dozen roads by PNC Infratech, which expects a valuation of about USD 1bn, sources previously told Infralogic.

The second potential deal is for five assets by Ashoka Buildcon for which the developer relaunched the process after mutually terminating a share sale agreement with KKR in May this year.

While a recent transaction was the sale of four highways to KKR by HG Infra Engineering for an enterprise value of INR 13.9bn (USD 168m), some big deals in the sector include the SMBC-backed Actis deal for USD 775m, Brookfield's portfolio sale to CPP Investments-backed IndInfravit Trust for for an enterprise value of USD 1.2bn as well as Sadbhav Engineering's USD 993m deal with the same trust in 2019, according to data compiled by Infralogic.

With India expected to tender up to about INR 7trn worth of greenfield projects in the next five to six years, the deal flow will remain healthy, providing an opportunity for foreign banks. 

Indian banks are unable to play a meaningful role in acquisition financing mainly because of regulatory restrictions, said Divyanshu Pandey, a partner at law firm S&R Associates. Indian banks can finance only up to 50% of the acquirer's contribution, he said, adding that local subsidiaries of foreign investors are not allowed to tap the domestic debt market, except for listed bonds.

"Foreign lenders will also need to deal with an investor outside Indian jurisdiction because funding a local entity will be treated as an external commercial borrowing, which can only be used for specific purposes, and acquiring an Indian company is not one of them," said Pandey.

Trusting Indian roads

Infrastructure trusts, introduced in 2014, were set up to hold cash-generating operational assets and are fast becoming popular investment vehicles. The InvITs have strong regulatory oversight, with each platform required to be registered with SEBI.

There are guidelines for increasing leverage at the InvIT level, with each threshold based on a specific number of distributions, ratings requirements as well as specified end use of funds, said Akshay Purkayastha, senior practice leader and director at CRISIL Market Intelligence and Analytics, S&P Global’s local arm.

“Combined with underlying road assets that have a good track record, mandatory disclosures and strong governance norms, the InvIT structure is a preferred vehicle for foreign institutional investors and lenders looking to have an exposure to the Indian infrastructure market,” said Purkayastha.

These include Singapore sovereign wealth fund GIC, Cube Highways and Infrastructure, US-based private equity major Kohlberg Kravis Roberts, Canadian pension funds CPP Investments and Caisse de dépôt et placement du Québec, Allianz Capital, OMERS Infrastructure, the Hong Kong Monetary Authority, the International Finance Corporation and the Asian Infrastructure Investment Bank.

More InvITs have been planned, including the one by Actis.