The InvITs are akin to mutual funds as they pool sums of money from a number of investors to invest in assets (infrastructure projects) that give cash flow over a period of time. Jio had $26 billion of debt and, of this, $15.4 billion will be transferred to the InvIT. Lower debt will help Jio get a better valuation — if it goes for an equity offering in a few years, say bankers.
When contacted, an RIL spokesperson declined to comment. An RIL insider said talks are currently on with banks and nothing has been finalised as yet.
Bankers said they are working on a template which has already been signed between RIL promoter Mukesh Ambani’s personal company, Reliance Industries
Holding (RIHPL) and Brookfield in February this year, when RIHPL transferred its pipeline business along with its debt worth $2 billion to another InvIT sponsored by Brookfield.
Since RIL will not extend guarantee to the debt transferred to the Jio InvITs, banks want to ring-fence their exposure.
According to the terms of the transaction, the pipeline infrastructure trust is required to maintain certain financial ratios like maintaining a minimum interest service coverage ratio, and a specified amount in the debt service reserve account. The trust is also required to ensure all payments, which are due and payable, are paid before the deadline.
The pipeline operating firm, Pipeline Infrastructure (PIPL), RIHPL, and the contractor of the pipeline maintenance had entered into a shared services agreement on February 11, 2019, which made it mandatory for RIL, which is PIPL’s customer, to provide PIPL (the company acquired by the InvIT) and the pipeline maintenance contractor certain identified services in connection with the pipeline business, for a period of three years. This was in order to enable business continuity, seamless operations, and an effective cost structure of the pipeline business, following the demerger of the pipeline business from East West Pipeline to PIPL.
A banker said most of the Indian business groups are now using innovative financial structure to move part debt. “However, this reduces debt overhang, but not a reduction in debt in the true sense of the term,” said a senior banker.