Hybrid annuity model projects facing funding woes, says India Ratings

More than half of the hybrid annuity model (HAM) projects awarded till July this year are awaiting financial closure, India Ratings and Research (Ind-Ra) said, while maintaining a stable outlook on the overall transport infrastructure sector.

“India Ratings’s analysis of the Rs 1.18 trillion worth of hybrid annuity model (HAM) projects awarded until July 2018 reveals only around Rs 580 billion achieved financial closure, due to lack of appetite and lending freeze on many public sector banks,” the agency said in its report on the sector released on Thursday.

The rating agency said about 18 per cent of the Rs 600 billion worth of projects, which await financial closure, may be affected by this. It added the number of HAM awards in the current financial year may slow down given the peak cumulative order book to revenue ratio of five major players — which was at a four-year high.

The National Highways Authority of India (NHAI), which is the awarding agency for both HAM and toll-operate-transfer (TOT) projects, is also expected to struggle with its TOT model.

Ind-Ra expects the second TOT project, which aims at generating Rs 54 billion, to go to bid in the December quarter and witness limited aggression.

“The aggression will be limited, given the learnings from the first project. While the financial closure for the first TOT project is achieved, the key challenges of determining first year’s revenue and underwriting risk for banks may reduce aggression in the second project,” the report said.

In what could help ease funding woes for the sector, India Ratings is hopeful that more under constructio projects will find buyers going forward.

“We expect under construction HAM projects to garner a reasonable share in the acquisition market. Traditionally, asset sales were restricted to operational projects, however in FY18, the sector witnessed for the first time a bouquet of under construction HAM projects being picked up by Shrem Group from Dilip Buildcon,” the agency said in its note.

Ind-Ra added this trend will gain pace and more deals would happen over the next 12 months. For the energy sector, Ind-Ra expects that in the absence of new power purchase agreements (PPAs), there is a possibility of recurring stress in plants with low long-term PPA tie-ups despite significant debt reduction.

“About 28.8GW of under construction and operating capacity had less than 50 per cent of PPA tie-up. The haircuts for banks on resolution plans are likely in the range of 40-60 per cent,” it said. 

Though there are concerns at sub-segment level, it has maintained a stable outlook on the overall transport infrastructure sector including toll roads, annuity roads, HAM projects and airports.

“An increase in traffic volumes and inflation-led toll, driven by steady economic growth, could elevate revenue growth by about 9 per cent yoy for toll road projects,” the report said.

INFRA OUTLOOK

|Ind-Ra maintained a stable outlook on the overall transport infrastructure sector including toll roads, annuity roads, HAM projects and airports

| For the energy sector, Ind-Ra said that in the absence of new power purchase agreements, there is a possibility of recurring stress in plants

| Of the Rs 1.18 trn worth of hybrid annuity model projects, only around Rs 580 bn achieved financial closure

| The funding woes are because of a lack of appetite and lending freeze on many public sector banks