Infrastructure investment trust (InvIT) issuances to grow five-fold to over Rs 2 lakh crore in the next two years, after the Securities and Exchange Board of India (SEBI) changed regulations in April 2019.

The amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014, are well-balanced. The leverage norms (debt to asset value) for InvITs have been relaxed to 70% from 49%, subject to trusts retaining ‘AAA’ credit rating, along with a track record of six continuous distributions to unit holders. However, the leverage cap is not applicable to privately placed, unlisted InvITs.

While the regulations were introduced in 2014, the first InvIT was floated only in May 2017. Till June 30, 2019, only two InvITs were publicly listed, with a combined asset value of ~Rs 20,000 crore. That, and two private listed InvITs, together have assets under management (AUM) of ~Rs 40,000 crore (refer to annexure).

“The relaxation in norms has accelerated the adoption of InvITs as an asset class,” said Sachin Gupta, Senior Director, CRISIL Ratings. “The impact can be seen in a slew of new InvITs being announced with the participation of marquee investors such as global private equity, and pension and sovereign wealth funds. Cumulative assets under InvITs are expected to increase to over Rs 2 lakh crore in the next two years.”

InvITs have invested in power transmission, roads and gas pipeline sectors. The 5-7 new InvITs announced have plans to invest even in relatively newer sectors such as telecom infrastructure and renewable energy. Long-term offtake contracts and strong counterparties provide revenue visibility, making these five sectors attractive to investors. Other infrastructure assets having similar characteristics, such as ports and airports, may also be suitable for InvITs.

For sponsors, InvITs provide a convenient route to monetise assets, unlock equity gains and deleverage balance sheets. This is critical to keep them invested in India’s infrastructure development, which, according to the Union Budget for this fiscal, will require fresh funding of Rs 100 lakh crore over the next five years.

For banks, financial institutions, pension funds and insurance companies, InvITs provide a low-risk investment opportunity because strengthened regulations now address the key risks of the infrastructure sector -- project risk and cash flow leakage. They do this in two ways:

One, by barring InvITs from having more than 10% of their assets in under-construction projects. This insulates cash flows from project implementation risks. Further, addition of newer assets to trusts diversifies the revenue stream.

Two, by mandating that at least 90% of free cash flows must be distributed at least once in six months. This ensures that cash flows generated are used primarily for distribution to unit holders, and thereby provide steady returns.

“For issuers (sponsors) and existing lenders, it frees up capital that can be deployed for further infrastructure asset creation,” said Nitesh Jain, Director, CRISIL Ratings. “For new lenders and investors, InvITs provide a low-risk opportunity with steady long-term returns.”

But insurers and banks haven’t been investing in InvITs because of regulatory restrictions. And retail investors have been apprehensive as the units of two listed InvITs are trading below their original issue price.

InvITs are hybrid instruments and cannot be equated with either equity or debt. For equity, dividend distribution does not result in price reduction due to a corporate’s perpetual existence and growth prospects. However, in the case of InvITs, continuous distribution would reduce value over time, as underlying assets have a limited life. The only way to avoid this is to keep adding fresh assets.

In this context, the recent announcement in the Union Budget allowing foreign portfolio investors to invest in debtsecurities of InvITs is welcome. Enabling regulations and investor awareness are the key to broaden the investorbase for InvITs.

On their part, sponsors of InvITs should exercise prudence in financial policies such as leverage, debt amortisationand asset-liability management to ensure sustainable credit profiles if they are opting for higher leverage. Thiswould help retain ‘AAA’ credit ratings as mandated by SEBI for increasing leverage over 49%.

Currently, most InvITs have opted for back-ended debt repayment structures to maximise distribution to unitholdersin the initial years, which exposes them to refinancing risks. Further, the mandatory distribution of 90% free cashflows may limit the liquidity left in the trust to deal with any contingencies.

InvITs issued so far