KEY RATING DRIVERS
Elevated Refinancing Needs in Near-Medium Term: The downgrade reflects the elevated refinancing risk during FY19 for R-Infra, its continued weak financial profile, delays in the conclusion of sale of its power distribution business (likely in 2Q19) and high level of financial assets on the balance sheet including loans and investments in group companies.
Ind-Ra has also revised the Rating Watch to Negative from Evolving to monitor R-Infra's planned deleveraging of the balance sheet post the sale of its power distribution business and would reassess the company's overall credit profile once its transformation into an engineering procurement construction (EPC) entity is complete. The Rating Watch Negative (RWN) indicates the possibility of R-Infra's ratings being downgraded or affirmed.
In October 2017, Ind-Ra had indicated that any delay in asset monetisation resulting in continued high net leverage would be negative for the ratings in the near-medium term. R-Infra has a refinancing obligation of INR44.9 billion (36% of outstanding debt as of FY18) in FY19, of which a substantial portion of debt falls due in the near term. Although management expects the company to generate cash flow from operations of INR2 billion at the end of each month, it will be inadequate to fund the debt obligations. The company thus will have to refinance them.
The company so far has not received arbitration money from Delhi Metro Rail Corporation (DMRC) while INR106.5 billion of the total consideration of INR132.5 billion for the sale of R-Infra's integrated Mumbai power business to Adani Transmission Limited (ATL) is still to be paid out. R-Infra in this context plans to meet these debt obligations through fresh refinancing from existing banks, proceeds from few other arbitration orders and issuance of equity shares to raise INR30 billion by way of rights issue or qualified institutions placements.
Debt Reduction in FY18: R-Infra's debt at end-FY18 reduced to INR124.3 billion (FY17: INR157.1 billion), led by a debt repayment using the advance of INR26.0 billion received towards the proposed sale of Mumbai power business to ATL, proceeds of INR10 billion from the sale of Western Region Strengthening System Scheme transmission assets to ATL and the pending through other sources.
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Including corporate guarantees of INR6.3 billion extended to group companies, gross adjusted debt remained elevated at INR130.6 billion in FY18 (FY17: INR163.8 billion). Consequently, leverage (gross debt/ EBITDA), although improved, remained in FY18 high at 4.3x in FY18 (FY17: 5.7x). Including corporate guarantees, adjusted leverage (gross debt+corporate guarantees/EBITDA) stood at 4.5x in FY18 (FY17: 5.9x). Interest coverage (EBITDA/interest cost) in FY18 remained low at 1.0x (FY17: 1.1x).
Exposure to Associates and Group Co; Likely Investment Write-down: Loans/inter-corporate deposits and investments in associates and group companies together accounted for 52.5% of the total assets in FY18 (FY17: 48%). Following the sale of power assets to ATL, the share of financial and strategic assets may exceed 70% of the total assets which would remain a key monitorable.
Financial support to associates and group companies has remained high, which would continue to weigh on the liquidity profile of the company. Timely recovery of the same remains to be seen.
Refocused on EPC: As of FY18, R-Infra had an EPC order book of INR287.0 billion (32x of FY18 EPC revenue of INR8.9 billion). Pending order book provides revenue visibility to EPC business over FY19-FY20. As the business is asset-light, Ind-Ra expects that the debt should not increase due to an increase in EPC revenue except for the working capital requirement.
Timely Completion of ATL Deal Remains Critical: On 26 December 2017, R-Infra had entered into a definitive agreement with ATL for the sale of its integrated Mumbai power business. The agreement includes R-Infra's integrated assets in power generation, transmission and distribution in Mumbai. The total consideration value was estimated at INR132 billion. In February 2018, Competition Commission of India approved the proposed sale. Maharashtra Electricity Regulatory Commission has scheduled the hearing on 14 June 2018.
Delay in Receipt of Arbitration Money from DMRC: According to the Delhi High Court directive, DMRC had an obligation to deposit INR35.0 billion (75% of the arbitral award) directly in the project lenders' escrow account on or before 6 April 2018. On 27 March 2018, DMRC paid INR3.06 billion to the lenders as directed by the High Court to avoid the account turning into a non-performing asset. This reduced the total debt to INR16.1 billion in FY18 (FY17: INR19.2 billion).
Further on 10 April 2018, the High Court directed DMRC to take over the debt servicing of the pending INR16.1 billion. It was agreed upon by the latter following an undertaking by Delhi Airport Metro Express Private Ltd, 100% subsidiary of R-Infra, that it will not enforce an INR51.6 billion arbitration award in its favour till the pendency of DMRC's appeal.
Notch Benefit: The rating of NCDs and term loans linked to regulatory assets has been notched up from R-Infra's Long-Term Issuer Rating as the debt programme is backed by the first and exclusive charge of investors on the proceeds of the regulatory asset collection approved by the regulatory commission to be recovered over 2014-2019 by R-Infra's Mumbai Electricity distribution business from its utility consumers. Also, the essential nature of the underlying business, identified stream of unencumbered cash flow, absence of any refinancing risk on account of matched cash flows, presence of a debt service reserve account of slightly over a quarter's debt service and scheduled amortisation of the debt by close to 67% provide strength to the debt servicing ability of the debt programme.
RATING SENSITIVITIES
Negative: Future developments which could, individually or collectively, lead to a negative rating action include:
- inability to timely refinance the upcoming debt maturities
- further delays in the deleveraging of the balance sheet
- increased support to group entities and associates
Positive: Future developments which could, individually or collectively, be positive for the ratings include:
- successful completion of the ATL deal and timely receipt of proceeds from DMRC arbitration
- growth in EPC business while maintaining a sound credit profile
- timely payment of debt obligations resulting in an improvement credit profile
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