By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has assigned Hazaribagh Ranchi Expressway Limited’s (HREL) proposed INR5.38 billion senior non-convertible debentures (NCDs) and proposed INR1.77 billion subordinated NCDs the following ratings:

Instrument Type

Date of issuance

Coupon Rate

Maturity Date

Size of the issue (million)

Rating/ Outlook

Rating Action

Proposed Senior NCDs*

-

8.50%

April 2027

INR5,380

Provisional IND AAA(SO)/Stable

Assigned

Proposed Subordinated NCDs*

-

8.75%

April 2027

INR1,770

Provisional IND AAA(SO)/Stable

Assigned

*The final rating is contingent upon the receipt of final documents conforming to information already received. The documents include all the finalised financing, transaction and project documents, including the legal opinion on the validity of transaction and structure, and an opinion related to taxation.

KEY RATING DRIVERS

Strong Counterparty: HREL’s revenue risk is mitigated as there is a high degree of predictability to the cash flows because it receives contracted, fixed annuity payments from the National Highways Authority of India (NHAI, ‘IND AAA’; Outlook Stable) - a highly rated, government-owned counterparty. Although the concession stipulates performance deductions (such as lane non-availability) in annuity payments, the sponsor’s track record in constructing and operating highway projects mitigates availability related risks. Furthermore, the company has received eight annuity payments from the NHAI, which provides strength to HREL’s ratings. Since the ratings also reflect the counterparty credit profile, any negative rating action on the NHAI will result in a rating downgrade for NCDs.

 

Sponsor Support: IL&FS Transportation Networks Limited’s (ITNL, ‘IND A’; Outlook Negative) undertaking to finance operations and maintenance (O&M) cost overruns without recourse to the project's revenue and assets, further mitigates the maintenance cost overrun-related risks. The sponsor, ITNL has also undertaken to cover any cost overruns in fixed price periodic and major maintenance contracts, any deductions in the annuity due to performance shortfall, and any shortfall between termination payments that may be received from the NHAI and total debt outstanding at the point of termination. Absent sponsor support on a timely basis and any significant deterioration in the credit quality of ITNL would result in a negative rating action.

 

Performance-related Risks Mitigated: HREL has a fixed-rate O&M, and major maintenance contract with ITNL. O&M costs and overlay costs in the contract have been certified by Elsamex Maintenance Services Limited. The contract allows for a pre-determined annual escalation and a full pass-through of any performance deductions. This mitigates performance-related risks to a reasonable extent.

 

According to management, major savings on O&M expenses compared to other projects would entail due to economies of scale offered by the maintenance of several state roads operated by the sponsor group under the concession from the state of Jharkhand, which are located nearby and accessible to HREL. This is also one of the major reasons for a lower maintenance expenses estimates; the adequacy of which are certified by Elsamex and a third party engineer.

 

Strong Structural Features: Major maintenance expenses will be funded through a reserve that will be semi-annually set apart from operational cash flows for ensuing six months and is part of the cash flow waterfall mechanism. An independent trustee will overlook structural mechanisms, including the receipt of annuity payments and the appropriations therefrom including debt service payments, which will be governed by the following prescribed waterfall mechanism: a) statutory dues; b) O&M; c) debt payment; d) NHAI concession fee account; e) reserve accounts (major maintenance reserve and debt service reserve account (DSRA)); and h) surplus account. Also, a one-year tail period provides adequate cushion to execute hand over requirements.

 

Moreover, bond documents are likely to include covenants that preclude additional borrowings, interest rate fixed at 8.50% and 8.75% per annum payable semi-annually for senior debt and subordinated debt, respectively. However, ITNL has infused a subordinated debt in HREL, which will be repaid only after the senior debt as per the escrow waterfall mechanism as defined in the concession agreement. There will be no cross default clauses. HREL’s debt service would have 30-day advance segregation between the annuity date and the debt repayment date, providing some cushion against any administrative delays in the receipt of annuities.

 

Security Features: HREL will create DSRA amounting to INR530 million from the proceeds of NCD issue. HREL has an option to replace the cash DSRA with non-fund-based bank guarantee from bank/Non-Banking Finance Company (at least ‘IND AA’/Stable), without recourse to the project cash flows or assets. Should the bank guarantee be invoked, the DSRA from then on will be maintained in cash. The bank guarantee will remain throughout the tenor of the rated debt. If the bank guarantee is not rolled over by the bank for some reason, it will have to be encashed and retained in permitted investments. The DSRA will be liened in favour of the independent trustee. Seven days before the due date (T-7), the trustee would invoke the DSRA bank guarantee and shall ensure that the escrow account has sufficient funds to meet the debt service, should there be a shortfall in the escrow account for the purpose of the debt service. The bank guarantee will be from the bank limits of sponsor.

 

Other assumptions include that there will be no contingent liabilities on the date of issuance and should a liability exist, it will be borne by the sponsor.


RATING SENSITIVITIES

Negative: Any negative rating action on the NHAI and/or absent sponsor support on a timely basis and any significant deterioration in the credit quality of ITNL would result in a negative rating action.


COMPANY PROFILE

HREL is a special purpose vehicle created by ITNL for the purpose of designing, constructing and maintaining four-laning of the Hazaribagh–Ranchi section of NH-33 to 114km from 40.5km in Jharkhand on a Build Operate Transfer annuity basis. The project was awarded by the NHAI under competitive bidding process and the NHAI has agreed to pay semi-annual annuity of INR640.8 million over the concession period of 18 years. The company has also received the final completion certificate effective 1 April 2015. HREL achieved provisional completion on 15 September 2012, and received the first annuity in July 2013. It has received full eight annuities till 31 December 2016, which is a credit positive. The project was completed ahead of time (commercial operation date achieved 134 days ahead of the scheduled project completion date), which entitled HREL to receive an early completion bonus of INR470 million.

HREL reported revenue of INR1,281.6 million in FY16 (FY15: INR1,281.6 million), EBITDA of INR1,208.1 million (INR1,212.9 million) and a net loss of INR 649.1 million (INR603.6 million).



COMPLEXITY LEVEL OF INSTRUMENTS

NCDs are instruments with moderate complexity levels, where the relationship between the inherent risk factors and intrinsic return characteristics is less straightforward, given the presence of certain contingency features. A special purpose vehicle structure is backed by a single asset.

For more information, visit www.indiaratings.co.in/complexity-indicators

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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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

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121