PCE to reduce cost of borrowing for projects: Ind-Ra

MUMBAI, Oct 23:  Reserve Bank’s move to introduce partial credit enhancement (PCE) for corporate bonds is a positive step as it will allow companies to lower borrowing costs, India Ratings has said.
“The guidelines will allow project companies to reduce their borrowing costs based on improved ratings,” the domestic ratings agency said in a note issued here.
“The key mandate of a PCE is to provide credit support in times of distress and also provide project companies time to turn around if they reach a situation of distress,” it added.
The Reserve Bank had last month come out with guidelines on PCE, allowing banks to provide PCE to bonds issued for projects.
A PCE enhances the credit rating of bonds, and hence, enables corporates to raise more resources from the bond market at better terms.
“To begin with, banks can provide PCE to a project as a non-funded subordinated facility in the form of an irrevocable contingent line of credit which will be drawn in case of shortfall in cash flows for servicing the bonds,” the RBI had said.
The ratings agency said this will help banks reduce their elevated exposures to infrastructure sector. It can be noted that the sector has been reporting highest incidents of asset quality stress.
It said the provision for allowing only those projects with a credit rating of at least ‘BBB-‘ and PCE of not more than 20 per cent will ensure that only those projects with stronger standalone credit profile will benefit.
The requirement to have an inter-creditor agreement among the issuer, PCE provider and other lenders will provide the rating agencies greater comfort in concluding that the benefits of PCE cannot be encumbered upon by other creditors in times of stress, it added.
It further said that non-amortisation of the PCEs, if not drawn in the initial years, will lead to greater level of support to bond holders in the later years and hence, is a credit positive.
In its second quarter review of the monetary policy in October, 2013, the RBI had first proposed to allow banks to offer PCE to corporate bonds with a view to enable long term investors like insurance and provident/pension funds to invest in bonds. (PTI)


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