By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed Andhra Pradesh Expressways Ltd.’s (APEL) INR2,658m Series D to G non-convertible debentures (NCDs) at ‘IND AAA(SO)’ with a Stable Outlook. The bonds are issued in the form of rated, listed, secured, redeemable NCDs. Simultaneously, Ind-Ra has withdrawn INR1,147m Series C NCDs’ (INR767m outstanding on 30 September 2016) ‘IND AAA(SO)’ rating with a Stable Outlook and assigned an ‘IND A1+(SO)’ rating to them, as they will mature within the next one year (April 2017).

KEY RATING DRIVERS

The affirmation reflects the project's satisfactory performance in line with Ind-Ra’s base-case expectations. This includes timely receipt of (13th, 14th and 15th) semi-annual annuities from the National Highways Authority of India (NHAI; 'IND AAA’/Stable), timely redemption of Series A and Series B bonds and maintenance of reserves as envisaged in the initial NCD structure (debt service reserve of INR600m and major maintenance reserve of INR225m). The debt service coverage ratio is in line with Ind-Ra’s expectations.

The ratings also reflect the strength of the structured obligation including sponsor support. Infrastructure Leasing & Financial Services (IL&FS, ‘IND AAA’/Stable) owns 13.26% equity in APEL, while the balance is directly and indirectly owned by IL&FS Transportation Networks Ltd (ITNL, ‘IND A’/Negative).
Sponsor support undertakings for annual and major maintenance cost overrun are crucial for the ratings. 

However, ITNL has indicated its plans to dispose of its entire equity stake in APEL to Cube Highways and Infrastructure Pte. Limited (Cube Highways), which it expects to close by end-November 2016. According to the information provided by APEL, ITNL has proposed to consolidate its shareholding in APEL by acquiring the 24,938,000 equity shares held by ITNL Road Investment Trust and the 4,468,620 equity shares held by IL&FS and then sell the 100% stake to Cube Highways. Simultaneously, Cube Highways and its affiliates are expected to infuse an amount of INR1,250m through a subordinated debt. APEL shall utilise the proceeds of subordinated debt to repay ITNL's debt.

Also, ITNL has proposed to alter the capital structure of the project company by converting/reclassifying its non-convertible, non-cumulative redeemable preference shares of INR2,200m in APEL to INR1,370m of subordinated and unsecured loans.

Some other changes quoted in the communication to the debenture trustee include the substitution of ITNL with Cube Highways for providing sponsor support undertakings in favour of the project, termination of the existing inter-
se agreement and changes in the debenture trust deed required to implement the transaction. According to ITNL, Cube Highways has agreed to extend similar support to the project that ITNL had extended, including the sponsor support undertakings which are understood to remain intact. 

All sponsor undertakings in the transaction would be replaced with similar undertakings from the new sponsor. All reserve requirements in the transaction would be unchanged and if the new sponsor brings in any additional funds in APEL in the form of debt, the same would be subordinated to NCDs, and serviced only out of the proceeds lying in the distribution account (subject to adequacy of all reserves and relevant financial covenants being met). The sponsor debt would not carry any default calling rights on APEL till the time NCDs are redeemed in full. 

The agency will monitor the project closely through the acquisition process, review the documents, the strength of the debt obligation under the new sponsor including the new sponsor support undertakings. Any weakening of the structure from the current one, in the view of the agency, could result in a rating action. 


RATING SENSITIVITIES

The credit quality of the sole revenue-counterparty and the discharge of its contractual obligations under the concession are important credit considerations. Hence, any negative rating action on NHAI will result in a downgrade of the rating on NCDs. 

Any weakening of the current transaction structure including sponsor support undertakings, additional liabilities/
contingent liabilities and non-availability of a back-up mechanism for performance warranties will also result in a downgrade of the rating on NCDs. 


COMPANY PROFILE

APEL is an SPV incorporated to design, construct (including lane expansion), finance, operate and maintain a 75km stretch between Kotakkatta by-pass and Kurnool in Andhra Pradesh on National Highway 7, under a 20-year concession NHAI, signed in March 2006. It is a build-operate-transfer project and its revenue is based on the availability model where National Highways Authority of India will pay fixed semi-annual annuities of INR565.20m each. The project achieved provisional completion on 30 September 2009.



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