By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has undertaken the following rating actions on KEC Bikaner Sikar Transmission Private Limited’s (KEC-BSTPL) loans:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Rupee term loan*

-

-

March 2031

INR1,710

IND BBB/Stable

Upgraded

Non-fund-based limit (bank guarantee)#

-

-

March 2031

INR100

IND A3+

 Upgraded

* Previously, the entire exposure was with ICICI Bank and now some amount has been underwritten. The entire facility amount has been mentioned as rupee term loan.

#
The bank guarantee has been carved out of senior secured term loan.

The upgrade reflects 74% and 90% physical progress of the project as on 31 March 2017 according to the latest lender’s independent engineer report and as on 30 June 2017 as per the management, the receipt of stage 1 clearance for right of way at two railway crossings and the timely receipt of viability gap funding (VGF)  (about 80% of the total VGF).


COMPANY PROFILE

Incorporated in September 2015, KEC-BSTPL, a wholly owned subsidiary of KEC International Limited (KEC), has signed a transmission service agreement with Rajasthan Rajya Vidyut Prasaran Nigam Limited (RRVPN), the state transmission utility, to implement a 400kV transmission line project (172km) on a design, build, finance, operate and transfer basis. The line will connect the Bikaner substation of RRVPN to the Sikar substation of Power Grid Corporation of India Limited and will evacuate power from a few thermal plants and wind farms in the region and improve the reliability and quality of power supply.

The project was awarded to KEC-BSTPL as it quoted the lowest VGF requirement based on a base unitary (transmission) charge of INR294.3 million per year declared for the project. The estimated project cost of INR2,443 million will be funded by debt, equity and VGF in a ratio of 70:18.2:11.8. The quoted VGF of INR288 million will be received by the company in proportion to project progress.

KEY RATING DRIVERS

Project Progress Ahead of Schedule: The management indicates that as on 30 June 2017, there were no right of way issues and more than 90% of the physical progress had been achieved. KEC-BSTPL has a fixed-time, fixed-price engineering, procurement and construction contract with KEC, the project sponsor. KEC-BSTPL expects to achieve a commercial operation date by August 2017 against the original scheduled commercial operation date of January 2018.

Predictable Revenue Stream: The ratings are supported by pre-determined availability-based unitary charge payments from RRVPN for 25 years. Unitary charge for the first financial year after commissioning is fixed at INR294.3 million per year. For subsequent years, unitary charge will be reduced by 1% yoy. Unitary charge will also be indexed to capture 30% of variation in the price index, which may partially address escalation in operation and maintenance charges. The entire transmission tariff for a particular year can be claimed on maintaining a normative availability of at least 98%.

Experienced Contractor Mitigates Residual Completion Risk: KEC-BSTPL has a fixed-time, fixed-price engineering, procurement and construction contract with KEC, which is also the project sponsor.

Strong Project Sponsor: KEC is a reasonably strong sponsor, having seven decades of record in constructing power transmission projects. Ind-Ra expects the project to benefit largely from the operational, management and financial support from KEC. Besides the committed equity for the project, KEC has committed to meet cost overruns and compensate for any shortfall or delay in realisation of VGF. Moreover, KEC has provided an unconditional irrevocable corporate guarantee for the entire facility amount, along with interest and charges, for a period of one year from the commercial operation date. According to the latest chartered accountant certificate, 100% of the project equity has been infused and about 80% of the VGF has been received. As per the management, the balance VGF is likely to be received by the end of July 2017.

Minimal Operational Risk: Ind-Ra considers transmission projects face low operating risks, given such projects generally achieve 98% availability. According to the company, operation and maintenance are likely to be carried out by a specialised agency and the contract would be awarded nearer to commissioning. Equipment and technology employed in the project is widely utilised in transmission lines in India.

Debt Structure: The project’s debt structure offers protection to senior lenders, including a security package, with financial lock-up triggers (total long-term debt to equity mix of 80:20; debt service coverage ratio of 1.10x), water fall mechanism prioritising debt service and other standard default covenants. Ind-Ra believes that the debt service reserve equivalent to three months of debt service is adequate to tide over short-term stress scenarios. 64% of the debt is amortised in structured quarterly repayments, while the balance is due as a bullet repayment on 30 March 2031. The presence of a 10-year tail period for the debt provides significant comfort with regard to the refinancing of the bullet repayment. Ind-Ra’s analysis indicates comfortable debt service coverage ratios during operations even in stress cases.

Counterparty Risks:
Counterparty payment behaviour would determine future rating movements. Ind-Ra takes comfort from multiple payment security mechanisms in the project structure, such as a default escrow account, a deed of hypothecation on revenue of RRVPN covering maximum monthly unitary charge in a year, and an unconditional, revolving and irrevocable letter of credit for minimum monthly unitary charge in a year.


RATING SENSITIVITIES

Although 90% physical progress has been achieved and about 80% of VGF has been received, Ind-Ra will monitor at least one year track record of timely receipt of unitary charges for further rating action.

Positive: Timely project completion, along with timely receipt of VGF, and/or a proven track record of unitary charge receipts could lead to an upgrade.

Negative:
Prolonged construction delays, delays in receipt of unitary charges and significantly higher-than-projected operating expenses and/or absent sponsor support could lead to a downgrade.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating/Outlook

7 July 2016

Rupee term loan

Long-term

INR1,710

IND BBB/Stable

IND BBB-/Stable

Non-fund-based limit

Short-term

INR100

IND A3+

IND A3


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the 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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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

    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