By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has assigned Barwa Adda Expressway Limited’s (BAEL) term loans the following ratings:

Instrument Type

Date of Issuance

Rate of Interest

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loan

-

-

June 2030

INR14,400

IND BBB-/Stable

Assigned

KEY RATING DRIVERS

Limited Residual Completion Risk: The company has already completed work on 74% of the project stretch, nearly in line with the target of around 75% as per the latest lenders’ independent engineer (LIE) report (May 2017). National Highways Authority of India (NHAI, 'IND AAA'/Stable), the concession grantor, has handed around 83% of the land and is likely to hand over the balance land in the ensuing quarters. The balance land is primarily required for service road and way side amenities. Tolling at Toll Plaza 2 is expected to commence from 3QFY18. The construction risk is mitigated by the presence of a fixed-price engineering, procurement and construction contract with the sole sponsor IL&FS Transportation Networks Limited (ITNL, ‘INDA’/Negative). 

Sponsor Undertaking:
The rating is supported by ITNL’s undertaking to fund cost overruns and to provide necessary support to meet financial covenants including maintaining a minimum debt service coverage ratio of 1.10x. The project cash flows are vulnerable to moderations in revenue growth rates and hence the sponsor support could increase, should the revenue projections be lower than Ind-Ra’s base case projections. 

Revenue Risk Remains
: Although toll collection started from the first week of April 2014, the toll is being collected only at one toll plaza. The independent traffic study expects the second toll plaza to collect around 2.33x more toll revenue than the existing one, once the remaining stretch is completed. This is on account of the additional traffic to be generated from the industrial towns of Asansol, Ranigunj, Andal and Durgapur located along the project corridor and travelling towards Panagrah, Burswan and Kolkata.  The management has stated that the second toll plaza is awaiting NHAI approval for the commencement of toll collection. As financial margin and coverage ratios are extremely thin, BAEL's ability to service its debt depends upon its achievement of the projected levels of patronage and growth rates. The project is also exposed to fluctuations in inflation as toll rates are linked to the Wholesale Price Index. 

Annual Premium Payment:
BAEL is liable to pay a premium which shall escalate 5% each year over the base figure of INR420 million (FY15).  The premium amount shall be payable in equal monthly instalments, within seven days of close of each month. Premium amount is being paid in a timely manner. 

Operational Expenses:
The O&M costs of BAEL are lower than peers’. That being said, Ind-Ra takes comfort from these costs being comparable with ITNL’s other projects and the strong experience of ITNL in operating and maintaining of highway projects. The major maintenance expenses are higher than peers’ since work on the first cycle will commence in the seventh year (FY24) and will be spread over four years. The second major maintenance cycle will be carried out between FY29-FY32. 

Debt Structure:
The principal will amortise in over 51 unequal quarterly instalments starting from December 2017. The project is exposed to a variable interest rate which is linked to base rate. The first reset of 25bp of spread reduction shall be on achieving the commercial operations date and thereafter, it shall be reset every two years. The project has a tail period of over 4.75 years. A debt service reserve account equivalent to one quarter debt service obligations would be created three months prior to start of commercial operations.


RATING SENSITIVITIES

Negative:  Any significant underperformance in traffic compared with the base case resulting in inadequate cash flows to service debt, absent sponsor support and any significant weakening of the sponsor’s credit profile could result in a negative rating action.
 


COMPANY PROFILE

BAEL has been granted a 20-year concession by NHAI to widen the Barwa-Adda-Panagarh section of NH-2 from km 398.240 to km 521.120 to six lanes including Panagarh Bypass in the states of Jharkhand and West Bengal on a design, build, fund, operate, and transfer basis. BAEL shall pay an annual premium amount of INR420 million from the appointed date and an escalation of 5% thereafter. The original schedule project completion date was 26 September 2016 and the revised date shall be in FY18, depending upon the availability of requisite right of way from NHAI.



COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity levels of the instruments, please visit https://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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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