L&T Interstate: Triumphant return

Indian infrastructure projects have been off-limits to offshore lenders for most of the 21st century. General concerns about the creditworthiness of the country's power sector, a competitive local market, and the country's banking regulations have made project finance an all-domestic affair.

But Larsen & Toubro's financing for the Palanpur-Swaroopganj road project is the first time since 1999 that an Indian borrower outside of the hydrocarbons sector has raised funding overseas. The financing also features comfortably the longest tenor for an external currency borrowing in India and comfortably the highest gearing – at over 90% – for an infrastructure project in India to date.

The Rs5.5 billion project features a $113 million (Rs5 billion) US dollar loan, lead arranged by Citigroup. The sponsor's structuring allowed it to raise the debt on extremely competitive terms. However, the strong risk profile of the project, and the sponsor support for the concession, means that the structure can only be adapted under certain limited conditions.

The project involves the upgrading of a 76km section of road under a build-operate-transfer concession from the National Highways Authority of India (NHAI). The concession has a term of 17.5 years, and was awarded in April. The section currently comprises dual-lane and single-lane highway, to be upgraded to four lanes as part of the concession.

NHAI first bid out the project as a real toll concession, with bidders assessed on how much subsidy they would require from the government. But the subsidy requests proved to be too high for the authority, which bid out the concession a second time on an annuity basis, where the concession-holder would receive semi-annual availability payments.

Larsen & Toubro was among more than ten bidders that expressed an interest in the real toll project, and beat roughly seven other bidders when it bid again for the road as an annuity concession. While it had used outside financial advice for the real toll bid, it used in-house expertise to assess the annuity bid.

The winning bid envisages a semi-annual payment of Rs43.2 Crore, and the payments start as soon as the road is operational, thus providing a powerful spur to on-time construction. The engineering, procurement and construction contractor is, like project company L&T Interstate Road Corridor, a subsidiary of L&T, and is providing a completion guarantee.

The concession and termination regime is relatively benign, although, while there are no deductions from the payment, the authority can withhold a payment altogether or terminate the project. In the event of a force majeure event or government default the termination payment will be sufficient to cover debt and equity. In the event of sponsor default the lenders will recover 90%.

Still, the steady stream of revenue, combined with L&T's expertise in construction and substantial market capitalisation, make the project very bankable. Indian banks, which suffer from a cost of funding that is high by international standards, can offer some benefits on a market risk concession, but for cheap long-term funding offshore banks excel.

Citigroup beat roughly three other interested institutions to take the mandate and is providing the debt split 50/50 between domestic foreign currency debt (FCNR) and external commercial borrowings. The two types of debt have the same terms and rank pari passu. Both facilities are priced at 150bp over Libor.

The main difference between the two facilities essentially lies in their different regulatory treatment. The domestic debt must feature a refinancing option at three years, because Indian banks are not allowed to lend at tenors beyond the length of their deposits, and so the FCNR debt would be refinanced with a Rupee facility priced off the three-year government benchmark. Whether this is exercised depends on how relatively attractive other Rupee assets are to lenders that point. The deal also features an automatic securitization provision, less a pre-agreed capital markets refinancing (such an option does not really exist in India) than the ability to increase the size of the facility if the borrower meets pre-determined triggers.

The sponsor has been forced to provide some comfort to lenders worried about the impact of interest rates and currency movements. With respect to currency risk, the Larsen & Toubro corporate treasury is providing a hedge against movements, reasoning that placing the relevant swaps on the open market would be prohibitively expensive.

With respect to interest rate risk, the sponsor has again had to provide support, this time in the form of a contingent equity contribution equivalent to roughly 15% of total project costs. This could be drawn upon in the event that movements in interest rates weaken the project's ability to service its debt. On the other hand, this commitment would be replenished if the project's cashflows and debt burden improve.

Joining the debt facility were India Infrastructure Finance Company Limited, Bank of Baroda and Abu Dhabi Commercial Bank, the last of which was the sole provider of the ECB debt. Citigroup also acted as the escrow agent.

The financing opens up the Indian market to offshore debt, at least a crack. Bankers eyeing the Indian market have displayed uncharacteristically long memories when assessing the merits of projects with government support. The strength of the concession agreement, and the strength of the sponsor, were key to making this financing possible.

L&T Interstate Road Corridor Limited
Status: Closed September 2006
Size: Rs5.5 billion
Location: Palanpur, India
Description: Financing for upgrade of a 76km availability-based road.
Concession awarder: National Highways Authority of India
Sponsor: Larsen & Toubro
Debt: Rs5 billion
Lead arranger: Citigroup
Lenders: India Infrastructure Finance Company Limited, Bank of Baroda and Abu Dhabi Commercial Bank
Lender technical consultants: Frischmann Prabhu (India) Private Limited
Lender environmental consultants: ERM India
Lender legal adviser: Trilegal Associates
Sponsor legal: In-house
Government financial adviser: Allianz Securities
Government technical consultants: M/s Aarvee Associates