Educomp Infrastructure & School Management's (EISML) pan-Indian schools PPP is the first to unlock the not-for-profit barrier in the Indian education sector. Indian law only allows non-profit trusts or societies to operate schools. However, the EISML deal uses a two-tier trust/society and management company structure thereby complying with not-for-profit regulations at the same time as providing sufficient comfort to lenders.

The Rs9.4 billion ($212 million) project is the first of two phases totalling 100 schools, and involves the construction of 50 kindergarten-to-12-years schools across India, 16 of which were operational in late 2009 and 34 of which will be operational be the end of 2010.

EISML is developing the school infratructure, which it will lease for 30 years to public charitable trusts founded by parent company Educomp Solutions Ltd's (ESL) promoter Shantanu Prakash. EISML will receive lease rentals equivalent to 14.5% of capital employed from these school trusts for the leased school assets and a 4.5% share of the schools' revenues (admission plus tuition fees). Another group company will provide content and management services.

The Rs5.8 billion debt package was lead arranged by Axis Bank (Rs2.5 billion), and featured Andhra Bank (Rs750 million), Bank of India (Rs1 billion), Corporation Bank (Rs500 million), Punjab National Bank (Rs1 billion) and Karnataka Bank. The debt has a 13-year tenor with a two-year grace period on payments at the start. Pricing is linked to the prime lending rates of all the banks involved, which average at around 13%. The average DSCR is 1.2x. The debt is ultimately secured by cashflows from lease payments made by each state government to the project company.

The deal contains a put and call option at the end of year 10, at which time nearly 70% of the debt can be repaid thereby giving lenders added comfort. However, given EISML's predicted growth the put option is unlikely to be exercised.

Like all deals in 2009, EISML's felt the fallout from the Lehman Brothers bankruptcy. However, by the time the storm hit, sole bookrunner Axis Bank had already tied up nearly 50% of the sell-down commitments it needed on the fully underwritten deal.

In addition to Axis Bank's backing and a very solid cashflow forecast for the project, extra comfort for lenders is provided by a first charge on all assets created by EISML and its receivables. The deal is also backed by an unconditional and irrevocable corporate guarantee from ESL.
EISML's next step will be to deliver Phase 2 of this programme, a project of roughly the same size and scope as the first, involving the delivery of 50 K-12 schools across the country, to be leased to state government bodies.

The Indian government estimates that the country needs 200,000 new schools in order to meet education needs over the next five years, and the Ministry of Human Resource Development is soon to officially allow private participation in education deals. This deal, as a frontrunner for private involvement in the education space, will be used as a benchmark in the sector going forward. And with the Indian government now setting legislation in place to provide around 2,500 schools on a PPP basis, the lesson is sure to be appreciated.

EISML
Status: Financial close 21 November 2009
Description: Rs5.8 billion financing of a portfolio of 50 schools across India
Sponsor: Educomp Solutions Limited
Financial adviser to the sponsor: Axis Bank
Participant banks: Axis Bank, Andhra Bank, Bank of India, Corporation Bank, Punjab National Bank, Karnataka Bank
Legal adviser to the lenders: India Law Services