This decision of IRDAI will lead to less dependence on banks. And give InvITs, REITs access to more flexible debt financing options. Currently, InvIT / REIT is heavily dependent on banks as the sole source of debt financing.
Major life insurance companies, including LIC of India, HDFC Life, ICICI Life, and SBI Life, are willing to invest in bonds published by Infrastructure Investment Trusts (InVIT). This will provide much-needed long-term financing to the needy lending sector that lends further for the construction of roads, towers, shopping malls, bridges, and other infrastructure.
Last week, India’s Insurance Development and Regulatory Authority (IRDA) approved insurance companies to invest in InvITs and Real Estate Investment Trusts (REITs).
According to fund managers, bonds issued by InvIT or REIT are likely to offer a minimum of 100 basis points more than the vanilla corporate bonds. The REITs or InvITs formed using a pool of assets that are pooled into a special purpose vehicle (SPV) that can sell bonds to increase debt up to 50 percent of net worth.
Initially, the insurance companies can purchase triple-A rated securities, such as NHAI and PowerGrid, with maturities ranging from 5 to 10 years. As the market matures, investors are likely to buy long-term bonds. The insurance company expected to earn 170 basis points more than government bonds with a similar maturity.
Insurer will not invest more than 10% of outstanding debts
IRDAI, on April 22, announced a circular stating that debt securities classified as ‘AA’ and above would be part of the ‘Approved Investment’ category for insurance companies. No insurance company is authorized to invest more than 10% of outstanding debt instruments in a single InvIT / REIT issue.
According to a fund manager, the investment risk is diversified. As InVIT / REIT invests in several SPVs that have full assets and different sources of cash. If there is a hurdle in the cash flow of a single project, others fill the gap by allowing interest payments on bonds.
Mukesh Gupta, managing director at LIC of India said, we are definitely considering investment opportunities for InvIT and REIT. Our country needs long-term financing in the sector of infrastructure. By nature it is a long-term investment, therefore, insurance can fill this gap. InvITs and REITs offer a good investment opportunity with very less project implementation risks.
Shivam Bajaj, director at Bajaj Consultants said: This decision of IRDAI will lead to less dependence on banks. And give InvIT / REIT access to more flexible debt financing options. Currently, InvIT / REIT is heavily dependent on banks as the sole source of debt financing. No investments are risk-free, nor are trusts. There is no accumulation of cash reserves to be used in times of stress. As 90% of net cash receivables must be distributed among the unitholders, not the bondholders.
Arun Srinivasan, head of fixed income, ICICI Prudential Life Insurance said: Insurance is a long-term business, making it ideal for investing in long-term infrastructure projects. This will enable this sector to receive more long-term financing from insurance companies. The spreads offered by these structures provide an attractive investment scheme while improving overall portfolio performance in a risk-adjusted manner.