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India’s top life insurers – LIC, ICICI, HDFC, SBI – are set to invest in InvITs, REITS

Top life insurance companies, including LIC of India, Life, HDFC Life and Life, are set to invest in the bonds issued by Infrastructure Investment Trusts (InVIT), providing much-need long term funding to the capital-starved sector that lends further to build roads, bridges, energy towers, malls, and other infrastructure assets.

Insurance Regulatory and Development Authority of India (IRDA) last week permitted insurers to invest in InvITs and Real Estate Investment Trusts (REITS).

“We are definitely examining InvIT and REIT investment options,” said Mukesh Gupta, managing director at LIC of India. “Our country needs long-term financing in the infrastructure sector. Since it is a long-term investment by nature, insurance can fill the gap. InvITs and REITs offer a good investment opportunity with very limited project execution risks.”

HDFC Life and SBI Life did not comment on the matter.

Bonds issued by InvITs or REITs are likely to offer at least 100 basis points more than vanilla corporate bonds, fund managers said. InvITs or REITs are formed using a pool of assets that are bunched up in a Special Purpose Vehicle (SPV), which can sell bonds to raise debt up to 50 percent of net worth.

Initially insurance companies may buy triple-A rated papers like NHAI and PowerGrid with 5-10-year maturities. As the market becomes more mature, investors are likely to buy into long bonds.

“Insurance is a long-term business making it ideally suited to invest in long-term infrastructure projects,” said Arun Srinivasan, head of fixed income, ICICI Prudential Life Insurance. “It will allow this sector to get more long-term funding from insurance companies.”

“The spread offered by these structures provides a compelling investment proposition, improving the overall yield of the portfolio on a risk adjusted basis,” he said.

An insurer is estimated to earn 170 basis points higher than similar maturity sovereign bonds.

On April 22, IRDAI issued a circular stating that the debt securities rated ‘AA’ and above shall form part of “Approved Investments” category for insurers. No Insurer is permitted to invest more than 10% of the outstanding debt instruments in a single InvIT/REIT issue.

“With the current announcement by IRDAI, it will result in lower dependence on banks and shall provide InvITs/ REITs an access to more flexible avenues for debt funding,” said Shivam Bajaj, director at Bajaj Consultants. “At present, InvIT/ REIT are highly dependent on banks as their only source for debt funding.“

“InvITs and REITs require stable and patient capital for their funding,” he said.

No investment is risk free and so are trusts. There is no cash reserve build-up that can be drawn down at the time of stress, as 90% of net cash receivables must be distributed to unitholders, not bondholders.

“The risk of investment is diversified as the InVIT / REIT invests in multiple SPVs which have completed and cash generating assets,” said a fund manager.

If cash flow is stuck in a single project, others help make good the shortfall, enabling interest payments on bonds.

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