By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has assigned Hazaribagh Ranchi Expressway Limited’s (HREL) non-convertible debentures (NCDs) the following final ratings:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Senior NCDs

-

-

-

INR5,380

IND AAA(SO)/Stable

Assigned

Subordinated NCDs

-

-

-

INR1,770

IND AAA(SO)/Stable

Assigned

The assignment of final rating is based on the receipt of executed financing documents.
Details of NCDs are given in Annexure.

KEY RATING DRIVERS

Strong Counterparty; Limited Revenue Risk: There is a high degree of predictability to HREL’s cash flows because it receives contracted, fixed annuity payments from the National Highway Authority of India (NHAI, ‘IND AAA’/Stable) - a highly rated, government-owned counterparty. The company has so far received nine annuity payments till 31 July 2017 from NHAI. Although the concession stipulates performance deductions (such as lane non-availability) in annuity payments, the sponsor’s (IL&FS Transportation Networks Limited’s (ITNL, ‘IND A’/Negative) 15 years of operating record in constructing and operating highway projects mitigates availability related risks. Since the rating also reflects the counterparty’s credit profile, any negative rating action on NHAI will result in a rating downgrade for NCDs. 

Sponsor Support:
ITNL’s undertaking to finance operations and maintenance (O&M) cost overruns without recourse to the project's revenue and assets, mitigates the maintenance cost overrun-related risks. ITNL has also undertaken to cover any cost overruns in fixed price periodic and major maintenance contracts, any deductions in annuities due to performance shortfall, and any shortfall between termination payments that may be received from NHAI and total debt outstanding at the point of termination. Absent sponsor support on a timely basis and any significant deterioration in ITNL’s credit quality 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 the management, HREL would save more on O&M expenses than other project companies due to the economies of scale offered by the maintenance of several nearby state roads operated by the sponsor group under the concession from the state of Jharkhand. This is also one of the major reasons for lower estimates for maintenance expenses; the adequacy of which are certified by Elsamex Maintenance Services 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 DSRA); and h) surplus account. Also, a one-year tail period provides adequate cushion to execute handover requirements.

Moreover, bond documents 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 according to 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 has created a debt service reserve account (DSRA) amounting to INR530 million from the proceeds of NCD issue. HREL has an option to replace the cash DSRA with a non-fund-based bank guarantee from a finance company (rated at least ‘IND AA’/Stable) before the issuance of bonds, without recourse to the project cash flows or assets. Should the bank guarantee be invoked, 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 debt service, should there be a shortfall. The bank guarantee will be from the bank limits of sponsor. 


RATING SENSITIVITIES

Negative: Any negative rating action on 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. NHAI awarded the project to HREL under a competitive bidding process and has agreed to pay a semi-annual annuity of INR640.80 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. The project was completed 134 days ahead of the scheduled project completion date, which entitled HREL to receive an early completion bonus of INR470 million. 

FINANCIAL SUMMARY

Particulars

FY17

FY16

Revenue from operations (INR million)

917.56

729.57

Total income (INR million)

927.79

731.66

EBITDA (INR million)

664.86

569.92

EBITDA margin (%)

72

61

Debt/EBITDA (x)

11.116

10.014

EBITDA interest coverage (x)

0.6226

0.5161

Source: Company

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 February 2017

Senior NCDs

Long term

INR5,380

IND AAA(SO)/Stable

Provisional IND AAA(SO)/Stable

Subordinated NCDs

Long term

INR1,770

IND AAA(SO)/Stable

Provisional IND AAA(SO)/Stable

ANNEXURE

Instrument

ISIN Number

Date of Issue

Coupon Rate

Maturity date

Issue Size (INR million)

Rating/Outlook

Rating Action

NCDs

INE526S07023

14 February 2017

8.50%

13 October 2017

INR400

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07031

14 February 2017

8.50%

13 April 2018

INR200

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07049

14 February 2017

8.50%

12 October 2018

INR200

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07056

14 February 2017

8.50%

12 April 2019

INR200

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07064

14 February 2017

8.50%

14 October 2019

INR200

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07072

14 February 2017

8.50%

14 April 2020

INR200

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07080

14 February 2017

8.50%

14 October 2020

INR250

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07098

14 February 2017

8.50%

14 April 2021

INR260

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07106

14 February 2017

8.50%

14 October 2021

INR250

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07114

14 February 2017

8.50%

14 April 2022

INR240

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07122

14 February 2017

8.50%

14 October 2022

INR250

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07130

14 February 2017

8.50%

14 April 2023

INR250

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07148

14 February 2017

8.50%

13 October 2023

INR290

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07155

14 February 2017

8.50%

12 April 2024

INR260

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07163

14 February 2017

8.50%

14 October 2024

INR300

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07171

14 February 2017

8.50%

14 April 2025

INR300

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07189

14 February 2017

8.50%

14 October 2025

INR300

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07197

14 February 2017

8.50%

14 April 2026

INR310

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07205

14 February 2017

8.50%

14 October 2026

INR350

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07213

14 February 2017

8.50%

14 April 2027

INR370

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07221

14 February 2017

8.75%

13 October 2017

INR240

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07239

14 February 2017

8.75%

13 April 2018

INR45

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07247

14 February 2017

8.75%

12 October 2018

INR55

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07254

14 February 2017

8.75%

12 April 2019

INR70

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07262

14 February 2017

8.75%

14 October 2019

INR80

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07270

14 February 2017

8.75%

14 April 2020

INR90

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07288

14 February 2017

8.75%

14 October 2020

INR55

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07296

14 February 2017

8.75%

14 April 2021

INR55

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07304

14 February 2017

8.75%

14 October 2021

INR75

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07312

14 February 2017

8.75%

14 April 2022

INR95

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07320

14 February 2017

8.75%

14 October 2022

INR100

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07338

14 February 2017

8.75%

14 April 2023

INR110

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07346

14 February 2017

8.75%

13 October 2023

INR80

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07353

14 February 2017

8.75%

12 April 2024

INR100

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07361

14 February 2017

8.75%

14 October 2024

INR70

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07379

14 February 2017

8.75%

14 April 2025

INR85

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07387

14 February 2017

8.75%

14 October 2025

INR100

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07395

14 February 2017

8.75%

14 April 2026

INR105

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07403

14 February 2017

8.75%

14 October 2026

INR85

IND AAA(SO)/Stable

Assigned

NCDs

INE526S07411

14 February 2017

8.75%

14 April 2027

INR75

IND AAA(SO)/Stable

Assigned


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.

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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