By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed North Karnataka Expressway Ltd’s (NKEL) INR4,636m (outstanding: INR1,169m on 31 July 2016) non-convertible debentures (NCDs) at ‘IND AAA(SO)’. The Outlook is Stable.

KEY RATING DRIVERS

Satisfactory Performance: The affirmation reflects the project's satisfactory performance in FY16, in line with Ind-Ra’s base-case expectations. This includes timely receipt of semi-annual annuities, timely redemption of NCDs, adequate maintenance of reserves for debt service, major maintenance and contingency, and debt service coverage ratios being consistent with base-case levels. 

Low Revenue Risk Profile:
The rating continues to reflect the project’s low revenue-risk profile, where annuities are secured through an escrow account of fixed, semi-annual annuity streams under a concession agreement from a highly rated counterparty, the National Highways Authority of India (NHAI, 'IND AAA'/Stable). The company has a demonstrated track record of receipt of 23 half-yearly annuities of INR505.17m each, without any performance-related deductions. 

Structural Features:
The project's structural features include a debt service reserve of INR400m, already established as a fixed deposit with Deutsche Bank (Fitch Ratings Ltd Issuer Default Rating: 'A-'/Stable). Also, a major maintenance reserve and a contingency reserve are being built up through semi-annual transfers from cash flows. As of 31 March 2016, the major maintenance reserve account had a balance of INR62.13m while the contingency reserve account had INR185m. IDBI Trusteeship Services Ltd (the trustee) administers the security-mechanism for NCDs, and the trustee-controlled escrow account is maintained with Deutsche Bank. 

Operating Risks Mitigated:
The performance-related risks are mitigated by the presence of a fixed-rate operations and maintenance contract with the main sponsor, IL&FS Transportation Networks Ltd (ITNL, ‘IND A’/Negative) and a development agreement with Punj Lloyd Limited (PLL). The second overlay was undertaken by ITNL at a higher rate since PLL denied doing it at the contracted rate. That being said, NKEL and ITNL have mutually agreed that the differential amount (INR154m) would be settled only upon recovery of the same from PLL. Timely transfers to major maintenance reserve, contingency reserve and escrow accounts continue to provide comfort. ITNL has over a decade-long track record in the construction and maintenance of build-operate-transfer (BOT) concessions, and is one of the largest BOT operators in the highway sector. 

Contingent Liability: NKEL has provided a short-term loan of INR795m to ITNL prior to the NCD transaction and accumulated interest of INR114.36m on 31 March 2016. According to NKEL’s management, this loan is payable on demand. There is a contingent liability of INR150.07m which is related to income tax demands and is contested by the company.


RATING SENSITIVITIES

A negative rating action could result from NHAI’s rating downgrade and any significant deterioration in ITNL’s credit quality.


COMPANY PROFILE

NKEL is an SPV, created to implement a lane expansion project under the BOT-annuity model. It is jointly sponsored by ITNL (93.5% direct and indirect equity interest with Infrastructure Leasing and Financial Services Ltd - IL&FS, 'IND AAA'/Stable) and PLL. Effective June 2002, the project has a 17.5-year concession from NHAI to design, construct, develop, finance, operate and maintain a 77km stretch between Belgaum in Karnataka up to the Maharashtra border on National Highway 4. The commercial operation date was achieved in July 2004, six months ahead of the schedule. NKEL refinanced the bank loans and advanced equity distributions through the NCD issuance in 2011.



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 


Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. 

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Analyst Names

  • Primary Analyst

    Ratnam Raju Nakka

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001742

    Committee Chairperson

    Venkataraman Rajaraman

    Senior Director and Head Infrastructure and Project Finance
    +91 44 43401702

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121