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All Roads Lead to Market in India Infrastructure Trust Debut

  • IRB Infrastructure’s Trust IPO set to debut in May first week
  • Sterlite Grid, Reliance Infrastructure Trust listings next

In a milestone 10 years in the planning, a slice of India’s public works are about to be made available to investors as bond-like securities promising double-digit yields.

IRB Infrastructure Developers Ltd., the Mumbai-based road operator, will begin the process next week of listing the hybrids, known as infrastructure investment trusts. The developer hopes to raise up to 50.4 billion rupees ($786 million) selling a fund to own and operate six toll road assets across five Indian states.

Proceeds will go to repaying 33 billion rupees of debt drawn by the parent’s subsidiaries from banks and other lenders -- a trick that shows why the trust arrangement is seen as a critical financing tool in a developing economy where other lenders are tapped out. They’re a funding option for firms building roads, ports and railway projects.

“With first Infrastructure Investment Trust coming in to existence we will be introducing third dimension to infra funding,” said Virendra Mhaiskar, the chairman and managing director IRB Infrastructure Developers, at a press conference at Mumbai. They’ll “free up the debt of the banks and these projects. The same can be used by lending institutions in building new projects,” he said.

Read more about India’s infrastructure investment trusts

IRB InvIT can offer 12 percent post-tax yield to funds and 10 percent to individual investors, Mhaiskar claimed. Income-starved investors are the target market as global bond yields languish near record lows. India’s 10-year government bond yields fell for three straight years, with a 50-basis point drop in the past year.

The trusts should also unlock liquidity in infrastructure investing. Before, someone allocating money to a toll road had just one way to earn a return: take a share of the tolls. With the advent of publicly-traded investment vehicles, cash outlays can be recuperated more easily, according to Sumit Jalan, managing director for investment banking and capital markets at Asia Pacific Credit Suisse.

Because of that, "there will be substantial increase in the private investment in to metro, non-metro infrastructure,” Jalan said.

IRB Infrastructure shares fell 1.1 percent to 251.95 rupees at the 3:30 p.m. close in Mumbai. They have rallied 29 percent this year versus the benchmark Sensex’s 13 percent gain in the same period.

The company will be able to bring down its debt to equity ratio to 1.8 from nearly 3 following the public offering as it will get 17 billion rupees in repayments from the trust. The lower debt may also help improve the company’s credit rating allowing it to raise fresh funds at a cheaper rate, Mhaiskar said.

IRB plans to expand the asset base of the trust by adding as many as two operational road projects every year after the listing, starting with the Amritsar-Pathankot stretch it maintains in the northern Indian state of Punjab.

“Both local and overseas investors are interested in IRB’s offering as the founder and the assets that have been transferred are well-known,” S. Venkatraghavan, managing director and head of equity capital markets at IDFC Bank Ltd., said on phone.

IDFC Bank and Credit Suisse are advisers to IRB for the initial offering.

Real estate investment trusts and InvITs, created mainly to invest in income-generating real estate and infrastructure assets, can raise 500 billion rupees in the near future, a recent report by CRISIL and Assocham claimed. Sterlite Power Transmission Ltd. and Reliance Infrastructure are also likely to offer trust listings this year.

"I think investors will still be cautious and lots of eyes will be there on the after-market success," Credit Suisse’s Jalan said.

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