Stressed infrastructure accounts see little hope in new RBI norms

The resolution effort may find itself in a conundrum where most road companies may not need it, and power companies may not benefit, say experts

The Reserve Bank of India’s (RBI’s) circular for one-time restructuring of standard accounts affected because of Covid-19 offers a pragmatic solution, but it might do little for infrastructure sectors, which were stressed even before the pandemic arrived.

The measures might find few takers in the sectors as most road companies might not need it, and power companies might not benefit, say experts. A K Khurana, director general, Association of Power Producers, a representative body of private power generators, said, “The committee has laid sector-specific financial ratios, which bankers need to adhere to. It may help to account for inter-sectoral differentiation, but there is nothing on addressing intra-sectoral differentiation.”

Most stressed accounts in the power sector are facing non-Covid concerns like lack of coal availability and power purchase agreements (PPAs). The current resolution, focused on Covid relief, does not help move the needle. “Projects with no coal and no PPAs are completely different and a class aside — no ratio would fit them and this would be the case of projects with minuscule PPA. The question then is should such investments, which have huge potential value, be liquidated?” asks Khurana.

Large standard power accounts, like JSW Energy and Tata Power, opted for the moratorium in April, only to opt out soon after. Both firms started servicing debt much before the moratorium ended.

Covid also hit traffic for highway projects, but not many of these are expected to seek resolution as traffic is recovering. “Some 1.1 times of debt service coverage ratio (DSCR) is not much to ask from operational projects, but I do not expect many road special purpose vehicles (SPVs) to seek a resolution as recovery in traffic has been good,” said Shubham Jain, senior vice-president and group head of ICRA. “Further, the National Highways Authority of India (NHAI) had already offered a Covid line to support projects under stress.”

Those who might seek a shorter residual concession period for road projects could face a hindrance in accessing the full benefit. “The recommendations are positive for the sector. However, road projects will need an extension of concession period beyond six months to benefit. The move will help BOT (build–operate–transfer) toll projects, where the tail period is more than two years and which are more impacted due to Covid,” said Ratnam Raju, group head, infrastructure and project finance, CARE Ratings. “Some road SPVs may seek restructuring, but not all, as traffic on some stretches is back to 85-90 per cent of pre-Covid levels.”

Others also expect companies with SPV model to face challenges in seeking a resolution. “For all industry in general, and infrastructure sector in particular, it is pragmatic. However, TOL/TNW (total outside liabilities/tangible net worth) can be a huge problem for those invested in SPVs,” said Sanjeev Agarwal, partner at PwC India. Most infrastructure and power companies hold various assets through the SPV model.

Most of the stress in the power sector arose from non-performing assets (NPAs) that preceded Covid. As of January 2020, of the total 36 identified stressed assets in the power sector, seven had been resolved through various debt-restructuring schemes. After the pandemic arrived, power distribution companies took the biggest hit as demand fell drastically. Barring a few city power distribution circles, most of India’s power distribution sector is state-government owned.

“The power sector value chain is completely different from other sectors as all the forward and backward linkages are completely dominated by public sector monopolies. Classic example is if the central government had not stepped in with a liquidity package, the entire portfolio would have been on the verge of becoming NPA. Regarding its applicability, we will have to see who fits the bill,” said Khurana.

There were 25 power generation projects awaiting resolution in January. However, despite the Centre’s and len­ders’ measures, stress in the sector has not eased. Among the unresolved cases, there are 10 assets worth 11,000 megawatt which are incomplete and unlikely to find any takers. “Resolving stress in the lumpy power and infrastructure sector through this mechanism will be challenging without economic revival and sector-specific packages and initiatives by the government,” analysts with Emkay Research wrote in a note on Tuesday.