Ind-Ra expects significant deleveraging (43% of INR25.78 billion debt on 31 December 2016) of operational road projects, resulting in improved coverage metrics and favourable gearing. The rating also reflects the sponsor's strong track record in the highway sector. Post issuance, both Hazaribagh Ranchi Expressway Ltd (HREL) and Sikar Bikaner Highway Ltd (SBHL) shall become zero-external debt companies, while Jharkhand Road Project Implementation Co Ltd (JRPICL) and North Karnataka Expressway Ltd (NKEL) will have an external debt of INR12.50 billion and INR1.99 billion, respectively.
The overall operational track record of the projects, stable cash flows (more than 90% of revenue in the form of annuities) and highly fungible cash flows of the InvIT structure bolsters the overall credit profile. The InvIT's cash flow shows considerable resilience to stress cases reflecting an adequate cushion for timely debt servicing in potential downside scenarios. The debt infused by the InvIT in the SPVs shall be subordinated to the external debt, and the InvIT shall not have a right to call an event of default under any project documents and/or any financial documents until the external debt is fully paid-off.
The rating is provisional since the proposed borrowing in the underlying assets are planned to be raised through bond issuances and the documents relating to the same are being finalised. The final rating is contingent upon the receipt of final documents conforming to the information already received. The documents include all financing and transaction documents including the legal opinion on the validity of transaction and structure, and an opinion related to taxation.
INVIT PROFILE
The sponsor, IL&FS Transportation Networks Limited's (ITNL, 'IND A'/Negative) has floated an InvIT and shall hive-off four operational SPVs namely, JRPICL, HREL, SBHL and NKEL under the said trust.
Subscription to InvIT's units will be raised through private placement. Proceeds from subscription will be used to prepay a portion of existing bank loans and promoter subordinated debt. Post the issuance, ITNL shall hold 26% of units in InvIT for an initial period of three years.
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INVIT OVERVIEW
IL&FS Transportation InvIT was established under Indian Trusts Act 1882 by signing Indenture of Trust dated 13 October 2016 with the trustee (Vistra ITCL (India) Ltd). The trustee would monitor InvIT's operations in relation to its investment objectives and compliance with applicable regulations. InvIT received the certificate of registration as an Infrastructure Investment Trust on 7 December 2016 under the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations 2014 (InvIT regulations). As required by InvIT regulations, the InvIT appointed IIML Asset Advisors Limited (IAAL) as an investment manager and ITNL as a project manager. The InvIT would receive principal and interest payments on debt lent to the portfolio assets apart from the dividends from the SPVs.
The InvIT shall provide guarantees for shortfall in termination payments for meeting any contingent liabilities currently outstanding in the books of JRPICL. The project manager shall provide undertaking for any cost overruns for operation and maintenance (O&M) including major maintenance. Although the SPVs shall continue to have separate escrow accounts, the structure of IL&FS Transportation InvIT would ensure that any debt service shortfall in JRPICL would be bridged by the surplus cash flow in any other entity. Distribution to unit holders from InvIT shall happen on or after July each year only after fulfilling the external debt obligations of JRPICL. SBHL shall make payments to the InvIT every quarter, while HREL and JRPICL will make payments semi-annually and annually, respectively. There will be no external debt other than existing external debt in NKEL and the proposed borrowings at JRIPCL.
KEY RATING DRIVERS
Strong Coverage Metrics: The significant deleveraging, which is visible in the projected coverage metrics with the base case, projects a healthy debt service metrics. The external debt holders of JRPICL shall have a charge on the distribution accounts of HREL, SBHL and NKEL. Ind-Ra assumes that JRPICL shall maintain cash reserve equivalent to one quarter's peak debt service and NKEL shall maintain debt service reserve of INR400 million; each of these shall be available through the tenor of their respective proposed non-convertible debentures.
Limited Revenue Risk: The rating gains strength from the guaranteed semi-annual annuity payment from the government of Jharkhand (GoJ), for all the five projects of JRPICL, a first of its kind arrangement seen for state annuity road projects. Total annuity for the five stretches is INR3,581 million. The GoJ has assured annuity payment (semi-annual) either through its own budgetary provisions or any other appropriate funding mechanism. A strong annuity payment mechanism commencing from submission of invoice at least one month before the due date to the Independent Consultant up to the receipt of the annuity payment from the GoJ, including the involvement of the main sponsor although barely seen in the state concession projects, lends structural strength to the project. As on 31 March 2017, JRPICL received 34 of the expected 150 annuities for all the five projects. The average delay in receiving annuities is around five days.
The rating also reflects NKEL and HREL's low revenue-risk profile, where annuities are secured through an escrow account of fixed, semi-annual annuity streams under a concession agreement from a highly rated counterparty, the National Highways Authority of India (NHAI, 'IND AAA'/Stable). As on 31 March 2017, NKEL and HREL received 24 and eight semi-annual annuities, respectively. SBHL's revenue is partially (40%) linked to the Wholesale Price Index other than a fixed annual escalation of 3% which mitigates price risk.
Completion Risk Mitigated: There is minimal implementation risk since all the projects are operational and have an established track record of annuity receipts. JRPICL shall upfront create a construction reserve of about INR100 million. The amount available in the reserve (post expenditure for completing the project) can be distributed to the sponsors only on receiving one full annuity payment for Chaibasa Kandra-Chowka project or receipt of the GoJ annuity letter, whichever is later.
Established Sponsor Group Track Record: The sponsors have a strong experience in the construction and operation of toll roads and annuity road projects with 30 projects at various stages of implementation. Maintaining the project stretches and collecting annuity are the responsibilities of Jharkhand Accelerated Road Development Company Limited. Ind-Ra's analysis assumes the execution of a fixed price O&M agreement and incorporation of base case estimates, prior to the issuance. Contractual clauses include a stipulation in the term sheet requiring any overrun therein will be met by the O&M contractor. The contractor shall provide undertaking if the GoJ reduces the annuity in accordance with the concession agreement due to a shortfall in the performance of the former.
Future Acquisitions Shall Hold Key: The investment manager intends to develop and expand IL&FS Transportation InvIT's portfolio of projects by capitalising on opportunities proposed to be provided by the sponsor to selectively undertake strategic acquisitions of both completed road assets and assets under advanced stages of construction. The fund shall have the right of first offer on assets of the sponsor and is expected to enter into Deed of Right of First Offer in relation to the same.
IAAL is a wholly-owned subsidiary of IL&FS Investment Managers Limited (IIML). IIML managed funds are invested into a wide variety of infrastructure investments. IAAL has an experience of over nine years in fund management.
Low Operational Risk: The O&M costs factored-in by the management are based on the historical numbers of each project. The average costs are largely comparable to the average cost of Ind-Ra rated peers. Debt service coverage ratio remains strong with underwritten routine O&M and major maintenance costs by the O&M operator. Considering ITNL group's vast experience in the highway sector, the O&M (both routine and periodic maintenance) of the project stretches is not expected to be a concern. ITNL's undertaking to finance O&M cost overruns without recourse to project's revenue and assets, further mitigates maintenance cost overrun-related risks.
Concentration Risk: IL&FS Transportation InvIT's rating remains constrained by InvIT's revenue, which is predominantly dependent on annuities from the GoJ.
RATING SENSITIVITIES
Future developments that may, individually or collectively, result in a negative rating action are:
- any material deterioration in the credit profile of the GoJ/NHAI
- material deterioration in the coverage metrics and/or loan to value ratio
- deterioration in the underlying asset quality and inclusion of under construction assets/weak entity in the portfolio
- any adverse regulatory changes
- breach of undertakings
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