Udayachal Highways' bond is rated BBB on its own. A bank's partial credit enhancement covering 20% of the bond lifts it to AA and cuts the coupon by 150 basis points on Rs 1,000 crore, for a fee of 1.2% a year on the amount covered. Is it worth it, and what does the investor now rely on?

Yes: the coupon saving of Rs 15 crore a year far exceeds the Rs 2.4 crore fee, a net Rs 12.6 crore a year, about Rs 83 crore over ten years in present value. A 20% enhancement lifts the rating because realistic stresses create shortfalls much smaller than 20% of the bond. The investor now relies on the toll road for most of the money and on the bank's standing and commitment for the part that matters in a bad year.

A student with a modest salary is offered a flat once a parent agrees to cover up to three months' rent if he ever falls short. The parent is not guaranteeing the whole lease, only the gap that a bad month would open. A partial credit enhancementA bank facility that pays shortfalls in a bond’s debt service up to a fixed share of the bond, so investors are protected against the losses most likely to occur. lifts a rating far more than its size because it absorbs the shortfalls a stress actually produces, not a total loss. Annual debt service is about Rs 152 crore. If toll cash falls 30% from its 1.25x base case, the gap is about Rs 19 crore a year.

Compare the two numbers on their own bases. The fee is 1.2% on Rs 200 crore, Rs 2.4 crore a year; the saving is 1.5% on the full Rs 1,000 crore, Rs 15 crore a year, so Udayachal keeps Rs 12.6 crore a year. Discounted at 8.5% over ten years that is about Rs 83 crore. The saving is overstated slightly, since an amortising bond's balance falls over time, but not enough to change the answer. There is also a benefit no coupon captures: an AA bond reaches insurers and pension funds that cannot hold BBB.

Two things, and the second is easy to forget. The investor relies on the toll road for most of the money and on the bank's credit and commitment for the rest, so a downgrade of the bank can pull the bond's rating down even if traffic is fine. The investor should read how the facility is drawn, whether drawn amounts are replenished, and where the bank's reimbursement ranks against bondholders. In India, bank partial credit enhancement is governed by RBI rules on how much a bank may provide and how it is capitalised; confirm the current framework before structuring.