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India-Ratings & Research (Ind-Ra) maintains a negative outlook on the toll roads sector largely due to the absence of strong traffic recovery for operational road projects and the non-availability of encumbrance-free construction land which restrains the toll road sector's prospects.
Although Ind-Ra expects the economic growth to be higher year on year in FY16, toll roads would have to cover substantial ground, to recover the lost traffic of the past two years. Concurrently, the receding inflation will curtail revenue growth especially for projects in which the annual increase in toll rates is 100% linked to the Wholesale Price Index.
Among the toll road projects in Ind-Ra's portfolio, around 10% were upgraded and 27% were downgraded in the last one year. The key reasons for downgrades were revenue under performance combined with the deterioration in the sponsor's credit profiles. Investors however, continue to look at investing into bonds backed by some of the road projects primarily due to the robust cash flows of these assets.
Ind-Ra in a release said Special purpose vehicles (SPVs) formed for road projects are structured in such a way, that the SPV has no recourse to debt from the sponsor in most cases. While assessing the credit matrix of construction (sponsor) companies and the support they provide to project SPVs, Ind-Ra takes into account this non-recourse nature of most of the loan facilities. The SPV, however, may be dependent on the sponsor in some way or the other which is often reflected in the ratings.
In assessing construction (sponsor) companies and the potential support they are expected to provide to project SPVs, Ind-Ra recognizes the non-recourse nature of most of the loan facilities. However, the ratings can still benefit considerably from the presence of a strong project sponsor.
