By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has assigned KNR Muzaffarpur Barauni Tollway Private Limited’s (KMBTPL) INR3,180m bank loan an ‘IND BB+’ rating. The Outlook is Stable.

PROJECT PROFILE

KMBTPL has been granted a 21-year design-build-fund-operate-transfer concession by National Highways Authority of India (NHAI; ‘IND AAA’/Stable) for the two laning of the Muzaffarpur-Barauni section of NH 28 from 519.6km to 627km. The project road, a 107.60km stretch, has been awarded on the basis of the bidding on premium payable to NHAI, i.e. bidder that quotes maximum premium payable to NHAI would win the project. KMBTPL will pay INR50m annually, along with 5% escalation. The project has been deferred due to delays in land acquisition, utilities shifting and others. The revised commercial operation date (COD) is 8 July 2016 against the original envisaged COD of 8 July 2014.

The envisaged project cost was INR3,596.8m. The project has incurred a cost overrun of INR991.8m due to the delays mentioned above. The revised project cost of INR4,588.6m has been funded through an equity of INR1,408.6m and a debt of INR3,180m.

KEY RATING DRIVERS

The rating is constrained by low coverage ratios, inherent traffic risk and high leverage due to cost overruns. However, the rating is supported by the undertaking provided by the major sponsor, KNR Constructions Limited (KNRCL; ‘IND A+’/Stable), towards debt service shortfalls and premium payments when demanded by the concession grantor, NHAI. In addition, KNRCL has given an undertaking to maintain a minimum debt service coverage ratio of 1.2x throughout the loan tenure.

Although the premium is payable from the date of the commencement of commercial operations (defined as provisional or final in the concession agreement),
KMBTPL is yet to pay INR50m. Nonetheless, KNRCL has sought the deferment of the premium and undertaken to pay the premium when demanded by NHAI. Given its demonstrated track record of equity investments and undertakings, Ind-Ra expects KNRCL to timely support debt service and other financial commitments of KMBTPL in the event of financial distress.

KMBTPL has successfully completed the project and has been able to receive the provisional completion certificate for 75% of the stretch. The project, 97.73% complete at end-June 2016, is scheduled for completion in April 2017. The absence of availability of land for the construction of toll plaza and pending punch-list items are affecting commercial operations.

Despite the stretch passing through major settlements in Bihar, such as Vaishali, Samstipur, Begusarai and Muzaffarpur, there is minimal traffic on the section. This has a negative impact on coverage ratios. After trial commercial operations, the project commenced tolling on 9 June 2016. Ind-Ra has assumed nine months of the first year of operations for base case projections.

Annual variable interest rate, which is linked to the base rate of the lead bank, poses financial risks. Significant fluctuations in interest rates, along with absent sponsor support, would be credit negative. The common loan agreement stipulates a debt service reserve account (DSRA) equivalent to three months of debt service obligations. However, the project company is yet to establish a DSRA.


KNRCL is expected to be an operations and maintenance operator
for the project for five years. However, it is unlikely to engage in tolling operations and major maintenance. KNRCL’s has significant experience in the operation and maintenance of road projects. Considering the experience and track record of KNRCL and that operations and maintenance are unlikely to be complex, Ind-Ra does not expect any major operations and maintenance risks.


RATING SENSITIVITIES

Positive: A sustained increase in toll revenue leading to improved coverage ratios could lead to a rating upgrade. Also, premium payment to NHAI or express approval for deferment could lead to a rating upgrade.

Negative:
The sponsor’s failure to provide continued financial support and revenues lower than Ind-Ra’s base case will trigger a rating downgrade.



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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

    Archana Tiwari

    Sr. Manager – Corporate Communications & Investor Relations
    +91 22 40001729