Executive summary
Three ‘I’s – infrastructure, investment and innovation, all necessitated by the pandemic – are scripting what promises to be an unusually busy time for the bond markets.
The government’s sharp focus on India’s infrastructure buildout to spur growth, as reflected in the National Infrastructure Pipeline (NIP) that envisages Rs 111 lakh crore of investments between fiscals 2020 and 2025, will be pivotal to this anticipated, heightened bond market action.
Raising that order would be an onerous ask even under normal circumstances – today more so, given the overwhelming fiscal burden on the government post pandemic.
Actionable innovative approaches to funding infrastructure thus become more urgent than ever. CRISIL estimates that innovation – by means of asset pooling, a well-capitalised credit guarantee enhancement corporation, and widespread adoption of the INFRA EL rating scale in the bond market – can help mobilise additional Rs 7-10 lakh crore of infrastructure issuances through fiscal 2025. It is by no means a small amount, and could help bridge part of the potential shortfall in funding the NIP.
Pooled assets can attract takeout financing from the corporate bond market. By providing structural credit enhancement through diversification across different counterparties and geographies, they reduce idiosyncratic risks. That can help banks and nonbanking financial companies (NBFCs) free up a portion of the over Rs 20 lakh crore credit outstanding to the infra sector for fresh lending to new projects.
Infrastructure investment trusts (InvITs), co-obligor structures, and securitisation of infrastructure loans are some of the mechanisms for pooling assets. The scale and diversification provided by these can also open doors to foreign capital into these projects.
A well-capitalised credit guarantee enhancement corporation can facilitate issuances by lifting standalone credit ratings of operational infrastructure assets to levels desired by investors. Thus, capital invested in such a corporation would have a significant multiplier effect.
The recent budget also proposed creation of a market making entity for investment grade corporate bonds. This is expected to impart much needed liquidity to the bonds and propel more confidence in various investor segments in going down the credit curve.
The INFRA EL ratings scale, which assesses the expected losses (EL) over the lifetime of an infrastructure debt instrument rather than only the probability of default (PD), is another tool that would reveal the typically low EL of such projects to investors, thereby evoking interest in them.
Issuances by non-banks (NBFCs and housing finance companies [HFCs]) are seen as another big source of bond supply over the next few years. They will have to float Rs 14-15 lakh crore of corporate bonds to achieve a compound annual growth rate (CAGR) of 11% in assets under management (AUM) in the next five fiscals, CRISIL’s analysis shows. This will also require securitisation to pick up and remain a key source of funding.
In the context, CRISIL expects total outstanding supply of corporate bonds to more than double from ~Rs 33 lakh crore in fiscal 2020 to Rs 65-70 lakh crore in fiscal 2025.
Demand, however, is expected to lag at Rs 60-65 lakh crore even if policy measures and institutional frameworks such as liquidity support for corporate bonds, credit default swaps, tax rationalisation measures for retail investors and foreign portfolio investments are put in place.
What could bridge the gap? A change in the way global capital is flowing, thanks to the rise of environmental, social and governance (ESG) factors, could come to the rescue.
Issuers, though, will need to keep an ear to the ground. An independent assessment of the credentials that lend credibility and make instruments attractive to ESG-conscious global funds will be a crucial facilitator.
