By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed IRB InvIT Fund’s (IRB InvIT) Long-term senior debt rating at ‘IND AAA’. The Outlook is Stable.

The rating reflects IRB InvIT’s strong ability to meet external senior financial obligations, including those of the entities under it. Post the acquisition of IRB Pathankot Amritsar Toll Road Limited (IRBPATRL), IRB InvIT’s consolidated external debt would be INR15.50 billion.  The entire borrowing of INR15.50 billion was borrowed at the IRB InvIT level. The rating on IRB InvIT is a reflection of the combined credit quality of the underlying assets. This is not a rating of the units of IRB InvIT. The rating should not be construed as any comment on the ability of the InvIT to pay promised dividend to the unit holders.

Ind-Ra expects the IRB InvIT to maintain robust coverage metrics and favourable gearing 0.20x. According to Ind-Ra’s base case analysis, with moderate growth rates over the tenor of the debt, the minimum debt-service coverage ratio (DSCR) stands at 2.53x. The overall operational track record of the combined portfolio (around five years) and highly fungible cash flows of the IRB InvIT structure bolster the overall credit profile. IRB InvIT’s cash flows show considerable resilience to stress cases, reflecting ample cushion for timely debt servicing in potential downside scenarios. IRB InvIT shall not have the right to call an event of default on the debt infused by it in the special-purpose vehicles (SPVs) under any project documents and/or any financial documents until the external debt of IRB InvIT is fully paid.

INVIT PROFILE

IRB InvIT was established under the Indian Trusts Act 1882 by signing a trust indenture dated 16 October 2015 with the trustee, IDBI Trusteeship Services Limited. The trustee would monitor IRB InvIT’s operations in relation to its investment objectives and compliance with applicable regulations. IRB InvIT received the certificate of registration as an Infrastructure Investment Trust on 15 March 2016 under the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations 2014 (InvIT regulations). As required by InvIT regulations, IRB InvIT has appointed IRB Infrastructure Private Limited (IRBIPL) and Modern Road Makers Private Limited as the investment manager and project manager, respectively. IRB InvIT would receive principal and interest payments on the debt lent to the portfolio assets, apart from the dividends from the SPVs.

The structure of IRB InvIT would ensure that a distribution to the unit holders from InvIT shall happen at least once in six months, only after fulfilling the external debt obligations of InvIT.


The subscription to IRB InvIT’s units was raised in a process similar to an IPO for raising equity investment in companies. The proceeds from the subscription have been used in prepaying existing bank loans and promoter sub-debt. Post the issuance, IRB Infrastructure Developers Ltd (IRB; ‘IND A+’/Stable) is holding 15% of the units in IRB InvIT Fund. The issue proceeds (target: INR50.35 billion) have been utilised for the repayment of 100% of the external outstanding debt (INR33.57 billion as on 18May 2017) and the entire sponsor debts/loans (INR12.89 billion as on 18 May 2017).

On 28 September 2017, the unit holders of IRB InvIT approved the purchase of IRBPATRL for a total consideration of INR15.69 billion, which is 12% discount to enterprise value of the asset, i.e. INR17.86 billion, according to Walker Chandiok & Co LLP’s valuation report. IRB InvIT raised INR15.50 billion to acquire a new asset. The proceeds from the debt issuance have been used for existing debt repayment and other corporate/business purposes (acquisition) of IRB InvIT.

KEY RATING DRIVERS

Likely Strong Coverage Metrics: Ind-Ra expects the acquisition of a new asset to maintain IRB InvIT’s combined debt-equity ratio at about  0.20x post the transaction. Ind-Ra had earlier assigned a Long-term senior debt rating of ‘IND AAA’ on a debt of INR10.0 billion. The agency has assumed the addition of INR5.5 billion to the debt while affirming the rating. This is also visible in the projected coverage metrics in the base case, with a healthy minimum DSCR of 2.53x (in FY31) and a loan life coverage ratio of 3.5x.

Robust Pool of Operational Assets: The rating reflects the robustness of cash flows from a pool of seven operating toll road assets with an average operational track record of around five years. Two projects (IDAA Infrastructure Private Limited (IDAA) and IRB Surat Dahisar Tollway Private Limited (IRBSD)), which accounted for 48% of the total revenue of all SPVs in FY17, registered an average revenue growth rate of about 7% for the period FY12-FY17. Loss of revenue due to demonetisation during FY17 was not included in FY17 revenue. That being said, Ind-Ra’s projections factor in the moderate growth rates for all SPVs. Of the seven projects, the toll rates of three (IDAA, IRBSD and M.V.R Infrastructure and Tollways) are 100% linked to the Wholesale Price Index and of the remaining are partially (40%) linked to the index, apart from a fixed escalation of 3%.

Premium Deferment Provides Cash Flow Support: Of the seven projects, IRB Tumkur Chitradurga Tollway Pvt Ltd has a premium deferment over the period FY15-FY24. The cash flows factor in an interest rate equal to 2% above the bank rate for such a deferment. The overall impact on cash flows due to the premium deferment is INR4.05 billion. In case project revenues are higher than the projections submitted to National Highways Authority of India (‘IND AAA’/Stable), the authority will have the right to advance the payments, which shall be in consultation with senior lenders.

Established Sponsor Group Track Record: IRB is one of the largest infrastructure development and construction companies in India. Apart from the seven InvIT assets, IRB had 15 road projects (seven operational and eight under construction) as on 31 August 2017. IRB’s ability and inclination to support its projects cannot be undermined and is well-demonstrated in the projects rated by Ind-Ra.

Comfortable Debt Structure: The proposed term loan has a door-to-door tenor 15.5 years (October 2017-March 2033). The term loan of INR15.50 billion shall be repaid in 62 quarterly structured instalments. However, the debt structure is highly back-ended (i.e. over 65% of debt shall be amortised in the last four years). In case of an extreme stress case, Ind-Ra expects the refinancing of the term loan with a longer tenor. A debt service reserve of INR0.5 billion shall be created upfront and another INR0.5 billion shall be created in the event of the DSCR falling below 2.0x in any particular year.

Acquisitions to Hold Key: Although the financial metrics indicate an ‘IND AAA’ rating, future acquisitions will hold the key to IRB InvIT maintaining the rating. The acquisition of further assets that may not yield similar coverages may pull down the rating. The InvIT regulations allow acquisitions of under-construction assets; however, the investment manager of IRB InvIT intends to acquire only operational assets on the basis of yield thresholds, traffic characteristics, residual concession period and others.

IRBIPL, the investment manager, has 18 years of experience in operating a road asset on a build, operate and transfer basis. IRBIPL would assess potential acquisitions and shall propose the same for the decision of the unit holders.


Refinancing: Given the back-ended debt repayment structure, it poses a refinancing risk in an extreme stress case scenario.

Low Operational Risk: The operating and maintenance (O&M) cost (including major maintenance expenses) projections are given in Table 1. According to the management, the projections are based on historical numbers for each project. An independent third-party consultant, GMD Consultants has vetted the adequacy of the costs based on normative parameters, and the average costs are largely comparable to the average costs of Ind-Ra-rated peers.

Maintenance expenses will be met using the operational cash flows of the respective projects. According to the waterfall mechanism, maintenance expenses will be met before subordinated debt payments to IRB InvIT.


While there will be no earmarked major maintenance reserve, the IRB management has stated that these expenses will be incurred by the respective companies annually. If the amount spent is lower than the projected costs, the balance will be retained at the respective SPV level, until the costs are expended. This assumption is critical for the ‘IND AAA’ rating. Any distribution by the SPVs out of the retention is a rating trigger. Debt service coverage metrics remain strong even in Ind-Ra’s stress case scenarios for routine O&M and major maintenance costs. Considering the IRB group’s vast experience in the highway sector, O&M cost (both routine and periodic maintenance) of the project stretches is unlikely to be a concern.

Table 1

O&M Projections (INR million)

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FY31

FY32

FY33

Bharuch - Surat Project

288.8

372.5

516.8

427.3

384.3

 

 

 

 

 

 

 

 

 

 

 

Dahisar Surat

473.8

552.6

571.7

440

365.8

196.8

 

 

 

 

 

 

 

 

 

 

Jaipur - Tonk - Deoli

218.3

254

320.2

389.5

404.6

307.3

315.3

336.8

351.3

693.8

742.6

842.5

355.2

376.5

396.7

487

Talegaon Amravati

139.8

163.1

190.5

175

260.1

272.5

219.5

227.1

235.1

243.4

384.2

424.2

261.3

271.5

282.2

293.4

Tumkur Chitradurg

97.3

109.6

199

140.5

148.5

148.5

156.5

334

164.5

172.5

180.5

188.5

486

197.7

205.7

213.7

Omallur Salem

88.9

136.5

139

97.6

100.5

103.4

178.1

181.4

72.4

76


 

 

 

 

 

Amritsar Pathankot

175.1

378.2

370.5

380.9

391.8

364.6

388.4

403.7

416.9

430.8

440.2

456.3

472.4

428.4

436.4

444.4

Total

1,481.9

1,966.4

2,307.8

2,050.8

2,055.5

1,393.2

1,257.8

1,482.9

1,240.3

1,616.6

1,747.5

1,911.4

1,574.8

1,274.1

1,321

1,438.6



RATING SENSITIVITIES

Future developments that may, individually or collectively, result in a negative rating action are:
- deterioration in the underlying asset quality and inclusion of under-construction assets/weak entity in the portfolio
- any systemic risk affecting the highway sector resulting in a significant decline in revenue increasing the risk of non-payment of external debt and obligations significantly
- any adverse regulatory changes
- distribution of amount unspent in accordance with the maintenance schedule
- significant underperformance in the traffic, leading to the weakening of DSCR


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

13 January 2017

Long term senior debt

Long-term

-

IND AAA/Stable

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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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