Need: Between the Equity & Bond Markets- InvIT
(Images courtesy: CRISIL)
InvIT is an independent asset class modelled as a infrastructure debt fund/NBFC on the lines of Hong Kong's and Singapore's trusts for differentiating itself as a secure Asset class. It is operational with over USD500mio AUM and aims at channeling institutional investment into Indian infrastructure, which the GoI has assumed to consolidate about USD43trillion over the next 20 years.. (as per Sharmila Chavaly, Secretary, GoI)
The trustees are put in place for each type of infrastructure separately viz. Airport/Roads/Building Projects for differentiation purpose.. The states of assets are part non-government owned and are managed by multiple trusts with long-term investment (low risk) structures and are the responsibility of trustees for each of its specialised activities. Almost 80% of assets yield stable returns with propensity to high risk-higer return betas.. which, the longer run evens out the asset class's returns..
The exit strategy is exercising going public to capital markets..and average returns expected are around 12.83% IRR annualised.. However, the fund has got some misconceptions about preference in favour of HNI i.e. retail investors.. exercising automatic options and over subscriptions..
The trust automatically addresses regulations and operating mechanism at par with developed regions across the world.. Although InvIT isn’t an active bond market, it is considered to exist as an independent asset class between equity and fixed income.. the reasons for this could be that there is a larger debt component vis a vis equity, and which is whey there tends to be higher equity availability currently to aid this dedicated infrastructure fund maintaining higher levels of liquidity..
While there are many a misinformed short-term IPOs giving higher risk-reward propositions, InvIT can be considered a specialist LT investment module..
The trust’s rating has been above normal, considering factors for return credits done by CRISIL, owing to the nature of operations, regulations and yield which are spread across dividends, interest earned on assets and returns on offloading stakes ..
Cash flow to stakeholders and Tax implications
In the base case across different Projects 1, Project 2.. etc., the Enterprise Value (EV) 'A' constitutes a proportionate outstanding debt 'B' with a equivalent equity valuation 'C', debt retained in Special Purpose Vehicle (SPV) 'D', locked-in Sponsor units 'E' and amount assumed required to be raised from investors 'F'..
It may be noted that debt:equity of about 64:36 for a 15% locked-in sponsor units relies heavily on equity investment to maintain assumed post-tax IRRs of 12.83% IRRs given the fact that the assumed break-even is at the end of Year 5 given extremely well managed asset class and real depreciation..
Advantages to developers
Cash distribution also gives out a dividend pay-out starting from Year 2 and relies on interest from SPVs on InvIT loans.. The yield-sensitivity gives this strong correlation between the two..
Although there are safeguards protecting InvIT investors' upsides, as becomes mandatory assuming about 80%-82% liquidity coming in from Sponsor investments. Each safeguard is marked against its evaluated risk viz. <=49% debt, not over 15% stake dilution etc. as there is a significant amount of skin-in-the game for Sponsors. However may seem uncertain the market risks, the business risks have been well covered by limiting construction risks to 10% of InvIT value..
The concessional agreement arrangements, especially with GST rolling out, not only raises credibility of this asset class by ensuring smooth, timely and efficient taxes by companies that might have been redundant before but also removes a force majeure event, decrease or competition..
InvIT Arithmetic: Sample case study
Comparison with traditional debt and equity investments
InvIT scoring over FI instruments is considerably higher primarily owing to the safeguards put in place: -
i) InvIT trust owns all the assets..
ii) It is less sensitive to interest rates as compared to traditional deposits
iii) Nature of returns are hybrid and upsides protected by adding in more projects
iv) InvIT owning 100% assets, there's no DDT while other instruments carry significant capital gains tax
v) Capital distribution is mandatory every 6 months as compared to cumulative/periodic distributions for non-convertible debentures or perpetual bonds*
(* It is safer to assume that the relative comparison is being done against perpetual bonds only)
Comparison with international examples
Comaprion of InvIT with Malaysian/Singaporean trusts highlighted two main benefits over international counterparts, besides giving a 7%-9% yield focussing infra, healthcare, IT and retail: -
i) Control aspect (such as removing trustee) is 60% against 67% for others
ii) Gearing is unlimited in both cases
iii) Tax exemption is 100% vis-a-vis corporate tax applicability** for international counterparts
vi) Complete tax exemption for unit holders
(** corporate tax applicability safeguards sponsor investments, however it may be speculative primarily when state offloads its asset control rights, and also the fact that any part state-owned trust if given subsidies is at the cost of overall economy which may not work well over the long run)
Inherent Risk that can be envisioned may be categorised as follows: -
i) What is the cash-flow risk of the underlying asset?
ii) Is it a better proposition for foreign, both private and institutional, investors given the length, size and nature of capital?
iii) What is the risk distribution assessment between trust's equity and loan incomes?
iv) How will this asset's trading fan out after going public in future?
v) What measures of control of asset will its Indian Directors have, and will these drive higher alphas?
vi) Are the SPV loans fixed? What impact with the bottom line figures have in case of a downturn?
For developers it is a core-requirement for monetising developmental projects and for investors is may turn out to be a boon-in-disguise considering a fall interest rates by RBI in the long-run if GLV growth rate falls short of optimum, staying invested in a safer FI instrument that is tax efficient with steady income, over a higher paying equity counterpart or lesser paying bonds..
Strong governance frameworks allows sponsors to repay part of debt while retaining some control over part of assets, while project managers can time the market for stake dilutions in a near-term bullish market..
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