By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed North Karnataka Expressway Ltd’s (NKEL) non-convertible debentures (NCDs) as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue

Rating/Outlook

Rating Action

NCDs

-

9.50%

January 2020

INR4,636 million

IND AAA(SO)/Stable

Affirmed

Outstanding: INR973 million on 30 April 2017

KEY RATING DRIVERS

Satisfactory Performance: The affirmation reflects the project's satisfactory performance in FY17, 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 with a highly rated counterparty, the National Highways Authority of India (NHAI, 'IND AAA'/Stable). The company has received of 24 half-yearly annuities of INR505.17 million each so far, without any performance-related deductions. 

Robust Structural Features: 
The project's structural features include an already established debt service reserve of INR400 million in the form of a fixed deposit. Also, a major maintenance reserve and a contingency reserve are being built up through semi-annual transfers from cash flows. As of March 2017, the major maintenance reserve account had a balance of INR148.13 million while the contingency reserve account had INR235.00 million. 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 (INR154 million) would be settled only upon the recovery of the same from PLL. Timely transfers to the major maintenance reserve, contingency reserve and escrow accounts continue to provide comfort. ITNL has over a decade of 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.

However, ITNL has indicated its plan to transfer NKEL to IL&FS Transportation Investment Trust (InvIT), which it expects to close by 1QFY18. According to the information provided by NKEL, ITNL has proposed to hold 26% stake in InvIT. ITNL has confirmed that there are no changes in the commercial aspects or scope of the O&M agreements for NKEL pursuant to its transfer to InvIT. 

Contingent Liability:
NKEL has provided a short-term loan of INR251 million to ITNL prior to the NCD transaction and accumulated interest of INR92 million on 31 March 2017. According to NKEL’s management, this loan is payable on demand. There is a contingent liability of INR110.2 million which is related to income tax demands and is contested by the company.


RATING SENSITIVITIES

Negative: 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 in Infrastructure Leasing and Financial Services Ltd, '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. 

NKEL reported revenue of INR1,010.34 million in FY17 (FY16: INR1,010.34 million), EBITDA of INR862.99 million in FY17 (FY16: INR866.63 million).


RATING HISTORY

Instrument Type

Current Rating

Historical Rating/Outlook

Rating Type

Amount (million)

Rating

27 September 2016

3 August 2015

13 May 2014

NCDs

Long term

INR4,636

IND AAA(SO)/Stable

IND AAA(SO)/Stable

IND AAA(SO)/Stable

IND AAA(SO)/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity level of the instruments please 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, structured finance and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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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