Kirtiman Infra can fund Rs 500 crore of capex with senior bonds at 8.6% or a perpetual hybrid at 10.5% that the rating agency gives 50% equity credit. Which keeps its rating, and at what cost?

The hybrid keeps Kirtiman under the line at 4.06x; senior bonds would take it to 4.38x and invite a downgrade. The headroom costs 1.9 percentage points on Rs 500 crore, about Rs 9.5 crore a year more than senior debt, and it is cheaper than raising half the money as equity. The step-up makes the hybrid a five-year instrument in practice, so the headroom must be replaced by then.

A family that borrows from a relative on the understanding that repayment waits until the children finish school has more cushion than one with a bank loan due every month. A hybridA security between debt and equity: it pays a coupon like a bond but is deeply subordinated, can defer payments and has no fixed maturity, so agencies treat part of it as equity. buys rating headroom by being loss-absorbing enough that the agency counts part of it as equity. Kirtiman pays a higher coupon for that privilege, because hybrid investors rank behind every senior lender and can have coupons deferred.

Senior bonds add the full Rs 500 crore: Rs 3,500 crore on Rs 800 crore is 4.38x, over the 4.25x line. The hybrid adds only Rs 250 crore to adjusted debt, giving 4.06x, because the agency moves the other half into equity. The headroom bought is 0.31 turns of leverage. On Kirtiman's own balance sheet the accounting may differ again, since classification follows the terms of the instrument; confirm the treatment with the auditors and the agency's current criteria.

The hybrid costs Rs 52.5 crore a year against Rs 43.0 crore for senior debt, so the rating headroom costs about Rs 9.5 crore a year. The alternative that gives the same adjusted leverage is Rs 250 crore of senior debt and Rs 250 crore of new equity. At an assumed 14% cost of equity that mix costs about Rs 56.5 crore a year, and it dilutes existing shareholders permanently. Whether the coupon is tax deductible depends on how the instrument is classified; confirm the current tax position before comparing after-tax costs.

If Kirtiman does not call in year 5 the coupon rises to 11.5%, a penalty every investor expects it to avoid. A step-up turns a perpetual into a five-year instrument in everyone's eyes, and agencies know it, so the equity credit is only as durable as the plan to replace the hybrid. The view: use the hybrid, because the new terminals will be earning by year 3 and leverage should fall back under 4.0x by year 5, when the hybrid can be called and refinanced with senior debt without breaching the line.