InvITs to help sponsors reduce debt by 65-70%: Chintan Lakhani, India Ratings

In a chat with ET Now, Chintan Lakhani, India Ratings & Research, says expecting positive impact on REITs issue and following InvIT issues which are expected to come.

Edited excerpts:


Can you walk us through as to how InvITs are going to help deleverage the infrastructure companies’ balance sheets?

Our report covers infrastructure InvITs, the deleveraging that it is expected to bring to the sponsor groups across infrastructure space. In FY18, we have seen approximate deleveraging of about Rs 13,000 crore across the four InvITs.

One has already hit the market last week, the other is expected to hit the market next week and in the next couple of quarters of this financial year, the remaining two InvITs are expected to hit the market.

As deleveraging to the extent of Rs 13,000 crore is expected, it will open up an opportunity for about Rs 4000 crore of potential refinancing debt. Through these InvITs the sponsors are expected to reduce debt to the extent of about 65-70% across these SPVs which are housed under the InvITs.

This is only the second InvIT to hit the market. It has taken more than two years for the first listing to take place. What is your view on the credit profile of the sponsor companies post the listing of InvITs and are you expecting any rub off effect on real estate as well, REITs and InvITs were unveiled together.

First and foremost on the credit profile, though most of the sponsors are going to offload their stake in the existing SPVs, the ones which are going to be house the InvITs, their credit profile is relatively stronger. That is one thing which is common across all the four InvITs that we are talking about.

On the point about the impact that it will rub off on the REITs, definitely it is expected to have some positive impact. It definitely has taken some time, about a couple of years but so far so good, better late than never.

Yes, we are expecting some positive impact on the REITs issue and the following InvIT issues also which are expected to come. In terms of the credit profile of the projects, one major benefit that InvITs offers is that if you would have been looking at hiring of one SPV then it would have been difficult because of some valuations issues but with a plethora of projects housed under one entity, it throws up many opportunities in terms of diversification multiple of projects.

So if one project is not faring well, definitely there are others which might subsidise the negative impact that the first project might have and definitely it offers a lot of unlocking of value from an equity perspective also. There is a lot of churning expected from an equity perspective as well. As we have been talking about long-term financing not being available in the infra space as well as the banking lending hitting the ceiling. That is another positive aspect of InvITs because new avenues of long term financing has opened up and definitely a win-win situation from all stakeholders.

A word on the interest rate regime. As we all know that it is going to play a huge role whenever REIT gets listed. On the future of InvITs, we have to compete with Singapore, Hong Kong, United Kingdom markets. as well. So how do you think today’s interest rate regime is going to impact the future of these InvITs and future REITs.

Interest rate regime definitely will have some impact. The way we see it is the balanced debt which will be housed under the InvITs, the balanced debt will be at a much lower, the loan to value ratio of each of these InvITs will be much better off now post the deleveraging. So the lower interest rates will definitely help in better refinancing terms also for the balanced debt. As far as the return for the foreign investors is concerned, what we understand and what we read is that the returns which the InvITs are expected to give to most of these foreign investors are slightly higher than what they would have earned in their respective countries globally. So at least at this stage we see that the returns possibly could be higher. But from a debt side, much of deleveraging is expected and it definitely impacts and helps better the coverages what we would have seen a coverage ratio of somewhere around 1.2x for a particular SPV, under the InvIT where we take a console approach where the financials are consolidated for all the SPVs under the InvIT, the coverages are much better at somewhere around 2-2.5 times for a DSCR coverage ratio.

From an investor’s point of view, how do you look at InvITs as an investment option for the long term?

Like I mentioned earlier, from an investor perspective also, this is definitely one of the better sources of returns mainly because it shows that there are numerous assets, house under the same structure. If I were an investor and I had to put my money in say particular asset, I would be wary of the ups and downs say of a toll road asset or something because the traffic or the revenue might not pan out the way I would have expected.

But with six assets and there are availability based assets also in some say for example the Sterlite InvIT, there is an assurity of return over there. But talking about roll road assets, assurity of return in terms of the diversification that it provides as mentioned earlier and at the same time these are assets which are operational. So these are assets which have demonstrated some track record and our analysis shows that even with slightly conservative growth rate also, from a debt perspective definitely the returns, we see much better DSCR coverages and the leverages and from an equity return perspective also, we expect that the returns that the sponsors are promising that could actually turn out to be true as well.