Refinancing potential up 10x to over Rs 1 lakh crore, with 100-300 bps rate benefits
The proportion of under-construction, high-risk highway projects has reduced significantly from 53 per cent two years back to 21 per cent now after a slew of steps were initiated by NHAI. These include significantly shorter timelines for right-of-way and approvals, loan support from the National Highways Authority of India (NHAI) for languishing projects, termination of stuck projects and their subsequent re-awarding, and affording a change in sponsor.
Today, only 2,000 km of the 9,400 km of highway projects under construction awarded by the NHAI on a build-operate-transfer (BOT) basis, are at high risk.
In the operational BOT portfolio, too, approvals for change in sponsor and subsequent refinancing, along with traffic growth, have yielded results.
“About 80 per cent of the operational portfolio comprising nearly 100 BOT projects are at low risk today in terms of debt servicing,” says Sachin Gupta, Senior Director, CRISIL Ratings. “These projects have debt service coverage ratios greater than 1, or strong sponsors that can manage cash flow mismatches.”
A debt service coverage ratio above 1 means cash flows are more than enough for the debt maturing in a specific period.
Apart from reduced risk, policy measures by the NHAI also resulted in a doubling of highway construction from 12 km per day in fiscal 2015 to 23 km in fiscal 2017. The pace is expected to quicken to ~40 km per day in the near-term. The awarding of contracts, led by the hybrid annuity (HAM) and toll-operate-transfer (TOT) models, is expected to sustain given the announcement and subsequent implementation of the Bharatmala project.
TOT is a new mode of project award initiated by NHAI, and segregates construction and demand risks. Once a project is completed, the tolling risk is passed on to investors and NHAI gets cash in lieu, which can then be reinvested to build more highways. However, as a concept, the model is yet to be tested.
Given the improved ground situation, both debt and equity investors are showing more interest in the road sector, especially in operational assets.
Operational road assets, especially annuity and HAM projects, will have steady cash flows over the concession period. Even toll projects exposed to traffic and tolling risk yield largely stable cash flows once they are operational. Such projects, with 5-15 years of concession periods, can potentially be refinanced with lower-cost, longer-tenure debt through issue of bonds and non-convertible debentures.
Says Sushmita Majumdar, Director, CRISIL Ratings, “With stronger sponsors, lower risk and reduced interest costs, CRISIL believes as much as Rs 70,000 crore of debt can be refinanced through bonds or bank loans in the medium term. Additionally, TOT projects could potentially securitise receivables worth ~Rs 40,000 crore, once awarded.”
In the past two years, Rs 10,000 crore of debt has already been refinanced through the corporate bond market, resulting in annual interest cost savings of 100-300 basis points for developers.