Financial closures turn elusive

...with firms unable to raise funding through both equity and debt

MUMBAI/ HYDERABAD: The wheel is grinding to … not a halt, but a very-slow walk, as it were.

With funding becoming a Frankenstein’s monster for scores of projects across the country, the all-important financial closure, which herald project beginnings, are becoming harder to come by.

Both equity and debt routes are virtually shut, and, to make matters worse, honchos say the situation is unlikely to ease any time soon, no matter the rate cuts announced — and to be announced — by the Reserve Bank of India.

“Projects depend on the Indian financial system and the issue is not just availability of funds but also the viability of projects in the current scenario,” said Y M Deosthalee, chief financial officer of engineering & construction giant Larsen & Toubro, alluding to the impact the current economic slowdown can have.

Financial closure is the process by which a company gets legally binding commitments on availability money across pre-specified timeframes for its project.

The commitment is made by banks, other financial institutions and equity investors.

Most firms do not begin their projects before achieving financial closure. There are a few, however, that raise a part of requirement privately and go ahead with the project in the hope of raising the rest of the money later.

E Sudhir Reddy, managing director of Hyderabad-based infrastructure player IVRCL, said risk aversion among lenders has meant that the debt-equity structure of many projects is changing.

“We normally bid for projects with a debt-equity ratio of 1:6. But bankers are keen on deleveraging or de-gearing this number to 1:3, which affects the whole structure of a project,” he said.

A debt-equity ratio of 1:3 means for Re 1 of equity capital, a company would get a loan of Rs 3.

Jitender Balakrishnan, deputy managing director of IDBI Bank, said most sectors are facing the financial-closure strain.

Companies that have not structured their finances are likely to be hit the hardest, he said.

“Some firms are facing a constraint because interest rates have risen and raising equity capital has become very tough owing to the slump in the stock markets. However, as far as the banking system is concerned, a company with an investment grade won’t find it difficult to raise funds,” he said.

A senior official from Infrastructure Leasing and Financial Services (IL&FS), requesting anonymity, said there is also a crisis of confidence..

“Currently, about a couple of projects that I know of have not been able to achieve financial closure, but the number could go up in the coming months,” he said.

The order book of infrastructure companies book would not necessarily see them through the crisis, he said. “That’s because orders can be cancelled or deferred any time in the current scenario.”

DNA Money had on last Tuesday reported that the $6 billion Essar Oil refinery project in Vadinar would achieve financial closure only by December, a delay of three months.
Mumbai-based Hindustan Construction Company last month announced that it was going slow on its Vikhroli slum rehabilitation and infrastructure projects.

“Many projects have not seen financial closures and funding is not forthcoming in the infrastructure business,” said Ajit Gulabchand, chairman & managing director of the company.

Bankers say closures have been delayed especially because equity funding has dried up, especially from sources such as private equity.

“The initial money for any project comes from equity or internal accruals, both of which have suffered due to the current market situation. As a result, firms are quite cautious about their upcoming projects,” said V Santhanaraman, executive director at Bank of Baroda.

But there are some who are not unduly worried —- yet.

The GVK group, for instance, would start working on the financial closure of its power project in Punjab in January 2009, according to its CFO, Issac George.

“As of now we are on schedule. We’ll do it in January,” said George.

But that looks more a case of exception than rule.

And the infrastructure bottleneck list gets quite long.

For example, the Airport Authority of India has also earmarked Rs 12,000 crore for developing airports through the public-private partnership (PPP) model next year.

But, according to Rajeev Batra, executive director, advisory services, KPMG, it is highly unlikely that infrastructure companies would be ready to participate in the bidding process.

“For the next 6-9 months the availability of funds is relatively low. A lot of road, power and nuclear contracts are expected to come up in this period, but the credit squeeze would mar the ability of the private players to participate,” Batra said.

Ditto road projects. Bidding is currently under the National Highway Development Programme (NHDP) for projects worth around Rs 60,000 crore.

“There will not be many takers for these projects given the difficulty in raising money,” L&T’s Deosthalee said.

Already, five road projects awarded under NHDP Phase V during the early part of the year have been delayed, according to a report by brokerage Motilal Oswal.

And this time, not many highway projects are expected to be awarded in December and January, generally the busiest months for road projects.

“That’s because elections are round the corner and the government cannot announce projects once the election schedule is out,” said an analyst with a local brokerage, who
did not wish to be named.

That’s another cross to carry.