By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has upgraded KNR Muzaffarpur Barauni Tollway Private Limited’s (KMBTPL) bank loans as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Bank loans

-

-

-

INR3,180

IND BBB-/Stable

Upgraded

The rating upgrade reflects continuing support by the sponsor in meeting cost overruns, repayment of debt obligations and premium payable to NHAI, and the receipt of the second provisional certificate for the remaining 25% of project stretch. KMBTPL has paid a premium of INR33.4 million and obtained approval for the deferment of the remaining premium of INR8.3 million for FY17. However, the rating is constrained by inherent traffic risk and weak coverage ratios. 

PROJECT PROFILE 

KMBTPL has been granted a 21-year design-build-fund-operate-transfer concession by National Highways Authority of India (NHAI;
‘IND AAA’/Stable) for two laning the Muzaffarpur-Barauni section of NH28 to 627km from 519.6km. The project road, a 107.60km stretch, has been awarded on the basis of bidding on the premium payable to NHAI, i.e. bidder that quotes maximum premium payable to NHAI would win the project. KMBTPL will pay INR50 million annually, along with 5% escalation. The project was deferred due to delays in land acquisition, utilities shifting and others. The revised commercial operation date (COD) is 24 August 2017 against the original envisaged COD of 8 July 2014. The project has obtained the first provisional certificate for 75% of the project stretch on 3 June 2016 and the second provisional certificate for the remaining stretch on 24 August 2017. 

The envisaged project cost was INR3,596.8 million. The project had incurred a cost overrun of INR991.8 million due to the delays mentioned above. The revised project cost of INR4,588.6 million was funded through equity of INR1,408.6 million and a debt of INR3,180 million. KMBTCL is owned 51% by KNR Muzaffarpur Holdings Pvt Ltd and KNR Constructions Ltd (KNRCL: ‘
IND A+’/Stable) and balance by JKM  Infra Projects Limited. 

FINANCIAL SUMMARY 

Particulars

FY17

Revenue from operations (INR million)

560.6

Operating expenditure (INR million)

449.8

Finance cost (INR million)

249.7

EBITDA (INR million)

110.8

Debt/EBITDA (x)

28.7

EBITDA interest coverage (x)

0.44

Source: Company


KEY RATING DRIVERS

Sponsor Undertakings: The major sponsor, KNRCL, has continuously provided support towards debt service shortfalls and premium payments when demanded by the concession grantor In addition, as per the common loan agreements, KNRCL has given an undertaking to maintain a minimum debt service coverage ratio of 1.2x throughout the loan tenure. 

KNRCL had significantly paid down the debt of one of its subsidiaries KNR Walayar Tollways Private Ltd, aimed at enabling the subsidiary to generate toll collections to meet debt servicing requirements. In view of this, the agency expects KNRCL to provide shortfall support towards KNRMBPL in the medium term. 

Premium Deferment:
Out of the INR41.7 million premium payable (on pro-rata basis) to NHAI for FY17, the authority has granted premium deferment to the tune of INR8.3 million and KMBTPL has paid the remaining INR33.4 million. NHAI has also granted premium deferment for the years FY23-FY26 to the tune of INR121.1 million. 

Limited Construction Risk:
The project has now commenced tolling on the entire stretch after the receipt of provisional certificates. The final COD certificate will be obtained after completion of works under the punch list with both the provisional certificates. 

Moderate Revenue Risk:
The project, being a toll road project, has inherent traffic-related revenue risk especially in light of limited availability of historical traffic data. This stretch is dominated by commercial traffic, which is also vulnerable to volatility mirroring economic cycles. Tolling has been commenced on the project road after the receipt of provisional certificates in June 2016 and August 2017. 

Subdued Operations and Maintenance Risk:
KNRCL is likely to be the operations and maintenance operator for five years and has significant relevant experience. Also, operations and maintenance are unlikely to be complex. Tolling operations and major maintenance are not part of the agreement. 

Variable Interest Rate and Non-creation of Debt Service Reserve Account:
Annual variable interest rate, which is linked to the base rate of the lead bank, poses financial risks. Although management has indicated that they would be able to bring down finance costs since the project is operational, significant fluctuations in interest rates, along with absent sponsor support, would be credit negative. A debt service reserve account equivalent to three months of debt service obligations is yet to be established.


RATING SENSITIVITIES

Positive: A sustained increase in the toll revenue leading to no dependence on the sponsor could lead to a rating upgrade. 

Negative: Absent sponsor’s financial support and any significant weakening of the sponsor’s credit profile could result in a negative rating action.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

23 November 2016

Bank loan

Long term

INR3,180

IND BBB-/Stable

IND BB+/Stable


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

    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