KEY RATING DRIVERS
Limited Completion Risk: The affirmation reflects receipt of provisional completion certificate for 99% of the project stretch on 16 August 2016, hand-over of 99.9% of the project stretch to SBHL and infusion of 100% equity in line with Ind-Ra expectations. The presence of a fixed price engineering, procurement and construction (EPC) contract eliminates any residual construction risk.
Sponsor Undertaking: The rating is reinforced by the sponsor’s undertaking to fund cost overruns including interest during construction, major maintenance expenses and shortfall/delay in receipt of the grant and to provide necessary support to meet financial covenants. SBHL’s credit profile is enhanced by the promoter’s undertaking which we believe, they are well-equipped to deliver. Ind-Ra expects IL&FS Transportation Networks Limited (ITNL, ‘IND A’; Outlook Negative) to provide timely support to the project including any cash flow mismatch in debt service during the time of distress.
ITNL which owns 100% of SBHL is one of the most experienced sponsors with a reasonably large portfolio of projects under operation, construction and implementation. The sponsor has a good mix of toll road projects and annuities in construction and operating stages.
Moderate Revenue Risk: The project, being a toll road project, has inherent traffic-related revenue risk especially in light of limited availability of historical traffic data. This stretch is dominated by commercial traffic, which is also vulnerable to volatility mirroring economic cycles. Tolling has been commenced on the project road after receipt of provisional certificates in October 2015 and August 2016. The revised traffic estimates by Feedback Infra Pvt Ltd are lower than the original estimates due to recent economic slowdown and traffic diversion on the alternate road network.
Comfortable Debt Structure: Subsequent to delays in the scheduled commercial operations, the principal repayment is shifted to June 2017 from June 2016. The principal will amortise over 42 unequal quarterly instalments from June 2017. The project is exposed to a variable interest rate, currently at 10.73% (weighted average). Interest rate is linked to the base rate and the spread is to be reset on Commercial Operation Date every two years thereafter. The project has a tail period of over nine years. A debt service reserve account equivalent to one quarter debt service obligations provides cushion in case of a cash flow mismatch.
Ratios: Ind-Ra base case indicates a thin
debt service coverage ratio (DSCR) due to lower traffic, necessitating sponsor
support for timely debt servicing. Ind-Ra base case DSCR indicates a low DSCR in
FY21 due to first major maintenance cycle scheduled between FY21 and FY24.
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