India InvITs should spread their wings and fly
IRB InvIT Fund brought India’s first infrastructure investment trust to market last week, making history with its Rp46.5bn ($727.4m) IPO. Books closed with demand for nearly 9x the shares available, in a huge boon for the asset class. But while the trade sets a high bar, future issuers need not follow its template.
The IPO has some interesting lessons for anyone looking to do an infrastructure investment trust, or 'InvIT', deal in India. Thanks largely to the generous 12% yield on offer, as well as the hype surrounding IRB InvIT as the first of its kind in India, it was able to reel in a hefty amount of foreign interest.
The 28 high profile investors who bought the deal as anchor orders also helped generate plenty of momentum, with the likes of the Singapore government, which got the biggest allocation, and the Monetary Authority of Singapore featuring prominently.
After the success of the inaugural trade, it is time for market participants to cast an eye towards diversifying the asset class, and assessing how future deals should come to market.
InvITs were created to spur infrastructure development in India, which is why, for the most part, issuers will come from the toll road sector, reflecting the country’s pressing need for a better road network. It is no coincidence that known InvIT candidates IL&FS Transportation Networks, MEP Infra Developers and Reliance Infrastructure all operate tolled expressways.
Yet future issuers — and many are indeed exploring the possibility on the back of IRB InvIT’s triumph — should not feel that the product is only to finance toll roads.
IRB InvIT may have offered a juicy 12% yield, but it does not create a benchmark for potential deals as the returns of each InvIT will ultimately boil down to the quality of its assets.
The generous yield on IRB InvIT reflected some of the risksaround the toll road sector. When India implemented its demonetisation exercise last year, the government exempted motorists from paying cash at national highways. The move resulted in a short-term cash squeeze for toll operators, and made it a challenge for them to meet monthly interest payments.
On the other hand, India Grid Trust serves as an example of the kind of diversity that investors can expect to see from future issuance. The InvIT, which is expected to launch its IPO next week, will have power transmission grids as its underlying assets.
Raising finance through infrastructure investment trusts is fair game for any infrastructure business with predictable cash flows and income, and the option of an IPO gives these companies certainty of liquidity and investors the chance of an exit.
That should make InvITs an attractive option for a wider variety of issuers.
Owners of power generation assets should consider InvITs as well, while the solar sector also shows potential. India Ratings and Research, owned by the Fitch Group, said as much in a recent report, highlighting that bank financing to the infrastructure sector has been declining.
That makes it imperative for investors and developers to scout for alternate sources of funding such as InvITs, with the current low interest rate regime also favourable for the instrument. If investors are cautious about the toll road industry, InvITs holding other assets will only prove more appealing.
As new types of assets come on board the InvIT trade, the asset class will play host to an ever-expanding universe of yields and products. That can only be a good thing for the market.