Refinancing of Rs 8,450 crore along with a risk-balancing approach could steer the highway sector out of trouble, Indian Ratings and Research (Ind-Ra) today said.
"Ind-Ra believes that although the highway sector is weighed down by concerns such as over-leverage, lower-than- expected cash flows and land acquisition issues, the possibility of refinancing to the tune of Rs 84.5 billion (Rs 8,450 crore) plus the risk-balancing approach could well prove to be the silver lining in the dark clouds looming over the sector for the past few years," the rating agency said in a statement.
A positive traction towards refinancing is already visible as developers with completed projects are tapping capital markets/banks for exploring refinancing opportunities to optimise on the rate of interest, the report said.
This would also aid in directing capital towards new projects. Refinancing would result in debt amortisation being better aligned with the expected cash flows thereby resulting in improved credit metrics and possibly positive rating movements, it said.
"In the next couple of years, the hybrid annuity model is likely to be the dominant model with 47 per cent of all projects being awarded on this model. In the current scenario of stretched liquidity position of sponsors, such a model balances risk appropriately between the concession grantor and the concessionaire and is likely to be the preferred mode of bidding for projects for developers," Ind-Ra said.
The statement said the Budget 2016-17 also prioritised the sector with a budgetary allocation of Rs 550 billion for roads and highways with an aim to invigorate private sector participation in the sector.
The Rs 550 billion allocation for roads and highways and Rs 50 billion allocation for Special Accelerated Road Development Programme in the most recent budget for the North-East region continue to provide impetus to the highway sector, it said.
Ind-Ra estimated that around Rs 255 billion of project level debt could be under stress and added, "Unfavourable macro-economic conditions, suboptimal traffic performance and stretched debt levels are the key reasons for the strain visible on project cash flows."
Unless the projects undergo a structural change, such as debt restructuring or refinancing, the projects' credit metrics are unlikely to improve substantially.
"Due to the capital intensive nature of highway projects, more than 70 per cent of the sample projects have a debt/equity ratio higher than 2.3x which further ratifies the extent of (over) leverage," it said.
Ind-Ra's analysis revealed that projects are 19 per cent
over-leveraged over FY 2017-25 to meet the lenders' restrictive covenants of 1.2x debt service coverage ratio, which if not reduced could lead to projects breaching restrictive covenants embedded in the financing agreements.
"In the projects rated by Ind-Ra, maintenance work of around Rs 3 billion is likely to be carried out in the next couple of years. Of these, around 64 per cent of the projects do not have any provision for major maintenance. Possible re-gearing or further sponsor support for funding the same cannot be ruled out," the statement said.
