Life insurance giants, including the Life Insurance Corporation (LIC) of India, HDFC Life, ICICI Life, and SBI Life, are preparing to invest in bonds that are issued by Infrastructure Investment Trusts (InVITs). This move is expected to provide crucial, long-term financial support to the lending sector, which then allocates funds for projects such as roads, towers, shopping centers, bridges, and various other infrastructural developments.
Last week, the Insurance Regulatory and Development Authority of India, otherwise known as IRDAI, gave the green light for insurance companies to invest in both InvITs and Real Estate Investment Trusts, which are also referred to as REITs.
According to perspectives offered by several fund managers, the bonds issued by either an InvIT or a REIT will likely provide a minimum of 100 basis points more than standard corporate bonds. The REITs and InvITs utilize a pool of assets aggregated into a special purpose vehicle or SPV, enabling them to sell bonds to increase debt up to 50 percent of their net worth.
Initially, the insurance companies involved can purchase triple-A rated securities, which include NHAI and PowerGrid, with maturity periods spanning from five to ten years. As the market gains greater levels of maturity, investors are expected to purchase long-term bonds. The insurance companies anticipate earning 170 basis points more than the returns on government bonds with similar durations.
Insurer Investment Cap
On April 22, IRDAI issued a circular specifying that debt securities with ratings of ‘AA’ and higher would be classified as ‘Approved Investments’ for insurance companies. According to the mandates, no insurance company has the authorization to invest more than 10% of the outstanding debt instruments in a single InvIT or REIT issue.
According to a fund manager, investment risk is significantly diversified. Both InVITs and REITs are to invest in multiple SPVs, which each possess unique assets and various sources of cash flow. Supposing disruption should occur that affects the cash flow of one determined project, the others will compensate by facilitating interest payments on bonds.
Experts Opinion
Mukesh Gupta, serving as the managing director at LIC of India, stated, "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, remarked, "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, who is head of fixed income at ICICI Prudential Life Insurance, explained, "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.”