India Ratings and Research (Ind-Ra) believes that although the highway sector is weighed down by concerns such as over leverage, lower-than-expected cash flows and land acquisition issues, the possibility of refinancing to the tune of INR 84.5bn plus the risk balancing approach could well prove to be the silver lining in the dark clouds looming over the sector since the past few years.
Ind-Ra believes that positive traction towards refinancing is already visible as developers with completed projects are tapping capital markets/banks for exploring refinancing opportunities to optimise on the rate of interest and tail. This would also aid in directing capital towards new projects. Refinancing would result in debt amortisation being better aligned with the expected cash flows thereby resulting in improved credit metrics and possibly positive rating movements.
In the next couple of years, the hybrid annuity model is likely to be the dominant model with 47% of all projects being awarded on this model. In the current scenario of stretched liquidity position of sponsors, such a model balances risk appropriately between the concession grantor and the concessionaire and is likely to be the preferred mode of bidding for projects for developers.
The Union Budget 2016-17 also prioritised the sector with a budgetary allocation of INR550bn for roads and highways with the aim to invigorate private sector participation in the sector. The INR550bn allocation for roads and highways and INR50bn allocation for Special Accelerated Road Development Programme in the most recent budget for the north east region continue to provide impetus to the highway sector.
Ind-Ra estimates that around INR255bn of project level debt could be under stress. Unfavourable macro-economic conditions, suboptimal traffic performance and stretched debt levels are the key reasons for the strain visible on project cash flows. Unless the projects undergo a structural change, such as debt restructuring or refinancing, the projects’ credit metrics are unlikely to improve substantially. Due to the capital intensive nature of highway projects, more than 70% of the sample projects have a debt/equity ratio higher than 2.3x which further ratifies the extent of (over) leverage.
Ind-Ra’s analysis reveals that projects are 19% over leveraged over FY17-FY25 to meet the lenders’ restrictive covenants of 1.2x debt service coverage ratio, which if not reduced could lead to projects breaching restrictive covenants embedded in the financing agreements.
In the projects rated by Ind-Ra, maintenance work of around INR3bn is likely to be carried out in the next couple of years. Of these, around 64% of the projects do not have any provision for major maintenance. Possible re-gearing or further sponsor support for funding the same cannot be ruled out.