Allocating a ₹2,400 crore Group Cap Across Four Competing SPVs
A state-level infrastructure fund with a corpus of ₹6,000 crore has a sanctioned exposure cap of ₹2,400 crore for a single sponsor group. The group has placed four financing requests on the same day: (i) a 300 MW solar SPV, ₹900 crore, base-case DSCR 1.28, PPA-backed; (ii) a container terminal SPV, ₹850 crore, DSCR 1.19, but with a port authority minimum revenue guarantee covering 80% of base-case revenue, which lifts the stressed DSCR to 1.24; (iii) a transmission SPV on a 35-year regulated tariff, ₹600 crore, DSCR 1.31; and (iv) a road HAM SPV, ₹700 crore, DSCR 1.16, with annuity payments due from a state authority whose budget has slipped by seven months in each of the last two years. The fund's policy sets a 1.20 DSCR floor for final sanction, with a permitted 1.15 floor where an authority payment is contractually secured; a 45% single-project cap on the group limit; and a 10% contingency to be held undrawn on each sanction. No sector cap binds - each asset is in a different sector. Requests total ₹3,050 crore.
1. Which combination should be sanctioned today? Show the arithmetic and state the decisive reason for each inclusion and exclusion.
Read the worked answer
Headroom. 2,400 − 3,050 = −₹650 crore to be cut. Single-project cap = 45% × 2,400 = ₹1,080 crore; the largest request (₹900 crore) does not breach it.
DSCR screen. Transmission (1.31) and Solar (1.28) clear 1.20 outright. Port Terminal at 1.19 fails the 1.20 floor on its own DSCR but qualifies under the 1.15 exception: the minimum revenue guarantee is from a statutory port authority covering 80% of base revenue, and stressed DSCR is 1.24. Road HAM at 1.16 nominally qualifies under the same exception, but the exception is written for payments that are contractually secured; a state authority that has slipped seven months in two consecutive years makes the annuity a credit exposure to a budget cycle, not a security.
Recommended sanction.
- Solar ₹900 crore
- Transmission ₹600 crore
- Port Terminal ₹850 crore (with MRG covenants)
- Total ₹2,350 crore, leaving ₹50 crore headroom.
- Road HAM deferred to the next cycle.
Decisive reason. The cut should fall on the weakest credit, not the smallest cheque. Dropping Road HAM removes ₹700 crore and preserves ₹50 crore of headroom for a contingency drawdown; cutting Solar partially instead would leave a sub-scale ticket in a project that is already the best-diversified asset in the book.
2. If the group cap were raised to ₹2,700 crore, what would you add, and on what conditions?
Read the worked answer
Additional headroom = 2,700 − 2,350 = ₹350 crore. Road HAM's request is ₹700 crore, so only a partial ₹350 crore sanction fits; confirm first that the SPV can be financed on a part-funded basis without breaching its own minimum-funding condition - a partially funded project is a construction-risk problem, not merely a portfolio-allocation problem.
If part-funding is feasible, sanction ₹350 crore subject to:
- A tripartite agreement with the state authority and the fund, giving the lender direct receipt of annuity and a right to cure before termination.
- DSRA of two annuity instalments, funded at COD, sized to the observed seven-month delay rather than to the contractual 30-day payment term.
- Escrow of annuity receipts with a waterfall and a cash sweep above 1.20 DSCR.
- A step-up option allowing the fund to fund the remaining ₹350 crore once the authority demonstrates two consecutive on-time annuity cycles, or once the project reaches COD.
- Pricing uplift to reflect the unsecured-annuity risk; a 1.16 DSCR credit should not price like a 1.31 regulated transmission asset.
Judgement. The ₹350 crore is worth deploying only because it buys sector diversification at a controlled ticket size. If the part-funding structure is rejected by the SPV, hold the ₹350 crore as unallocated headroom - an unallocated limit is a better asset than a mispriced one.
3. A board member argues that the ₹50 crore left undrawn is 'dead capital' and should be sanctioned to whichever SPV can absorb it fastest. Evaluate this quantitatively and qualitatively.
Read the worked answer
Quantitatively, ₹50 crore of headroom is 2.1% of the group limit and would add less than ₹4.5 crore of annual interest income at 9%. Against that, a single missed annuity cycle on a ₹350 crore HAM exposure, or a 90-day delay on a ₹850 crore terminal drawdown, costs far more in provisioning and monitoring than ₹4.5 crore. The marginal revenue from deploying the last 2% of the limit is trivial relative to the marginal risk.
Qualitatively, the headroom performs three functions the board is not pricing:
- It is a contingency reserve: sanctioned-but-undrawn limits routinely require top-up when project costs overrun, and a group with no headroom must return for a fresh approval.
- It is optionality: it preserves the ability to fund a Road HAM step-up without reopening the group cap.
- It is a discipline device: a cap that is always fully utilised is not a cap, it is a target.
The correct response is to leave the ₹50 crore unallocated and to record in the approval note why. The board member's instinct - that an unused limit is waste - inverts the purpose of a limit, which is to constrain, not to be consumed.