By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has rated Jorbat Shillong Expressway Limited’s (JSEL) proposed senior and subordinated non-convertible debentures (NCDs) as follows:

Instrument Type

Date of Issuance

ISIN Number

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Proposed senior NCDs*

-

-

-

January 2030

INR6,412

Provisional IND AAA(SO)/Stable

Assigned

Proposed subordinated NCDs*

-

-

-

January 2030

INR2,488

Provisional IND AAA(SO)/Stable

Assigned

* The final rating is contingent upon the receipt of final documents conforming to information already received. The documents include all the finalised financing, transaction and project documents, including the legal opinion on the validity of transaction and structure, and an opinion related to taxation.

KEY RATING DRIVERS

Stable Revenue Profile: The ratings reflect the commencement of commercial operations of JSEL’s project post the receipt of a provisional commercial operations date and three annuities from National Highways Authority of India (NHAI; ‘IND AAA’/Stable) in time and in full. The project faces limited revenue risk as the revenue will be derived from availability-based semi-annual annuity payments of INR725.1 million from the reasonably strong counterparty. Although these payments are subject to deductions for underperformance and lane unavailability, Ind-Ra draws comfort from JSEL's fixed-price routine operation and maintenance contract with the sponsor IL&FS Transportation Networks Ltd (ITNL; 'IND A'/Negative) and the latter's reasonable operating track record of 16 years. 

Demonstrated Support for Funding Cost Overruns:
ITNL has given an unconditional and irrevocable undertaking to fund cost overruns till final completion of project limits the risk related to funding for residual construction. ITNL will also provide an undertaking to fund construction cost overruns, if the construction cost exceeds the construction reserve. According to Lenders Engineer Report of June 2017, the project company has incurred INR14,737 million against the original estimated project cost of INR8,240 million and the entire cost overrun has been funded by ITNL. According to management, pending work in the project would require around additional INR150 million for final completion; this will be set aside from the proceeds of the issuance (construction reserve), and will fund the residual construction. 

NHAI has already provided the balance portion of the land, and according to the management, residual construction will be complete by 31 January 2018. Any liability on account of non-performance or construction completion will be on ITNL. 

Sponsor Support:
ITNL has also undertaken to fund any shortfall in the annual maintenance and major maintenance expenses during the concession period. ITNL’s undertaking to finance operations and maintenance (O&M) and major maintenance 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 a performance shortfall, and any shortfall between termination payments that may be received from NHAI due to concessionaire event of default 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:
Any increase in the routine O&M expenses over and above the contracted value will be passed on to the O&M contractor. Also, any deduction from NHAI for the reasons attributable to the O&M contractor will lead to a deduction in the payment to the O&M contractor. JSEL will enter into an O&M and major maintenance contract with ITNL prior to the NCD issuance and this agreement will be applicable through the life of the NCD. The adequacy of O&M and major maintenance costs has been certified by a third-party engineer. 


Minimal Residual Completion Risk:
JSEL received provisional commercial operations date for 55.94km out of 61.8km in January 2016. According to LIE report, the delay in the completion of pending work is mainly attributed to the government of Meghalaya/Authority for the delay in handing over the land required for Umsning bypass and toll plaza. According to management, the land for Umsning bypass is handed over to project and 4.6km out of 5.24km is already completed and pending work is expected to be completed by January 2018. Residual completion risk is minimal, as the construction reserve of INR150 million shall be created for the completion of residual pending works.

Debt Structure:
The debt repayment commences in March 2018 and the loan will be fully repaid in 25 unequal semi-annual instalments up to January 2030. The repayment (principal and interest) shall be made after one month and three days from the date of receipt of annuity, providing sufficient cushion against any potential delays in the receipt of annuities. Though the debt service coverage ratio shows limited ability to withstand revenue deductions, ITNL’s strong experience in operating and maintaining road projects and a track record of receiving full and timely annuities for its other projects provide comfort. Major maintenance reserve shall be created from the annuity receipts. Major maintenance testing shall be done in the cycle of every five years i.e. FY18-FY23, FY24-FY29 and FY30-FY34. Unutilised funds, if any, shall be released at the end of each such cycle after setting aside the budgeted major overlay expenses for the next financial year. 

The presence of a debt service reserve account equivalent to six months principal and interest payments will provide cushion in case of any delay in receipt of annuity. The company will have an option of replacing the same, either in full or in part, with an unconditional and irrevocable guarantee, having no recourse to project assets, cash-flows. The bank guarantee can be provided by the institutions rated AA- and/or above. However, this will be subject to a stipulation that if the guarantee is not rolled over, it will be encashed by debenture trustees of JSEL 30 days prior to its maturity and thereon will be maintained in cash in JSEL for the remaining tenor of the NCDs.

There will be no further borrowings by JSEL
other than IL&FS Group borrowings and additional external indebtedness as permitted by the authority.


RATING SENSITIVITIES

Negative: A negative rating action could result from any of the following:
·         any deduction in annuity on account of non-performance/lane non availability
·         failure to comply with various sponsor support undertakings and lack of timeliness in support requirements
·         significant deterioration of the sponsor’s rating i.e. to BBB category
·         deterioration of credit profile of NHAI
·         any deductions by NHAI, not being reimbursed by ITNL within 15 days of such a deduction


COMPANY PROFILE

JSEL is a special purpose company, incorporated to implement a lane expansion project under the build-operate-transfer annuity model. The company is jointly sponsored by ITNL (50%) and Ramky Infrastructure Ltd (50%). JSEL has a 20-year concession (expiring in January 2031) from NHAI to design, construct, develop, finance, operate and maintain a 61.8km stretch between Jorbat (Assam) and Barapani (Meghalaya) on National Highway-40. The original commercial operations date envisaged for the project was 10 January 2014; however, it was extended by two years to 10 January 2016. 

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Revenue from operations (INR million)

988.85

1,139.54

Total income (INR million)

1,821.43

2,114.84

EBITDA (INR million)

1,612.63

1,862.79

EBITDA margin (%)

88.54

88.08

Source: Company

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

28 October 2016

15 September 2015

2 September 2014

Proposed senior NCDs

Long term

INR6,412

Provisional IND AAA(SO)/Stable

-

-

-

Proposed subordinated NCDs

Long term

INR2,488

Provisional IND AAA(SO)/Stable

-

-

-

Senior long-term rupee loans

Long term

INR7,000

IND A/Stable

IND A/Stable

IND BBB+/Stable

IND BBB+/Stable

Subordinated loans

Long term

INR400

IND A-/Stable

IND A-/Stable

IND BBB/Stable

IND BBB/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity level of the instruments please visit 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

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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