Here’s India’s first hybrid annuity project rating assigned by CRISIL

Assigns ‘CRISIL A/Stable’ rating to Sadbhav Bhavnagar Highway CRISIL Ratings has assigned India’s first rating for a road project based on the hybrid annuity model (HAM). The rating, ‘CRISIL A/Stable’, was assigned to the bank facilities of Sadbhav Bhavnagar Highway (Sadbhav Bhavnagar), a special purpose vehicle (SPV) of Sadbhav Infrastructure Project, which in turn, is a subsidiary of Sadbhav Engineering. Sadbhav Bhavnagar was set up to execute the four-laning of the Bhavnagar-Talaja section of NH-8E, which spans about 48 km, at a cost Rs 819 crore. NHAI had introduced HAM to encourage greater participation of private sector players under which it would fund 40 per cent of the project cost. This reduced the equity infusion requirement of the developer during the construction phase. The NHAI also guarantees fixed annuity payouts. Additionally, operating and interest costs get adjusted for inflation and prevailing interest rate in the operational phase. Says Sachin Gupta, Senior Director, CRISIL Ratings, “Over the past couple of years, the key risks impeding India’s highway construction goals were implementation and financing. These have been largely mitigated, and the game has changed for the better, following facilitations such as upfront contribution by the NHAI, government assistance in land acquisition, and expeditious approvals. Consequently, the construction phase of HAM projects are fairly ring-fenced.” Half of the road projects awarded under HAM achieved financial closure a year after the NHAI introduced it, though some of them are facing challenges largely with respect to the ability of sponsors to infuse equity, and aggression when bidding for projects. Says Sushmita Majumdar, Director, CRISIL Ratings, “Project viability based on bidding parameters and financial support, as well as the wherewithal of sponsors, will be critical to any credit assessment of HAM projects during the construction phase.” Sadbhav Bhavnagar’s rating factors in the inherent benefits of HAM, substantial right-of-way and approvals accorded, low funding risk and expected operational and financial support from parent Sadbhav Infrastructure Project. Construction work of the Bhavnagar highway project commenced in February 2017. The initial stage of the project exposes the company to moderate implementation risk. However, Sadbhav Bhavnagar is a low-complexity project and the implementation risk is mitigated to an extent by the fixed-price, fixed-time contract with, and strong project execution capabilities of, Sadbhav Engineering. Any delays in project implementation will remain the key rating sensitivity factor. Detailed rationale CRISIL has assigned 'CRISIL A/Stable' rating to the long-term bank facilities of Sadbhav Bhavnagar Highway (SBHPL). The rating factors in inherent benefits of the hybrid annuity model (HAM) such as substantial right-of-way (ROW) and approvals received, low funding risk, and expected operational and financial support from Sadbhav Infrastructure Project Ltd (SIPL). These strengths are partially offset by moderate implementation risk, given the project is in the initial construction phase. Key rating drivers and detailed description Strengths: Substantial ROW and approvals, inherent benefits of HAM SBHPL has received substantial ROW and approvals, which are critical during the construction phase of the project. As on date, 95 per cent of the ROW required, and major approvals including environmental and forest-related, are in hand. The company has also begun construction. Furthermore, the project enjoys benefits of HAM such as 80 per cent ROW assured on the appointed date; automatic change of project scope if 100 per cent ROW is not provided within 180 days of the appointed date; and, cost escalation assurance provided by the National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’). Further, SBHPL has signed a fixed-price, fixed-time contract with Sadbhav Engineering (SEL), which has extensive domain expertise spanning about three decades in the construction business, and a track record of project execution within budgeted time and cost. CRISIL, therefore, believes SBHPL will benefit from SEL’s project execution capabilities and the substantial ROW and approvals received. Low funding risk The total project cost of Rs 819 crore is being funded by NHAI/debt/equity in a 40 per cent/48 per cent/12 per cent ratio, respectively. Funding risk is low because SBHPL has already tied up with banks for loans, and the sponsor has brought in ~35 per cent of its equity contribution. SBHPL has also received mobilisation advance (~10 per cent of bid project cost) from NHAI. Furthermore, SIPL has provided an undertaking on financial support in case of cost over-run and for cash-flow mismatches during the construction and operational phases. Expected operational and financial support from the sponsor SBHPL is likely to benefit from the strong operational and financial support of SIPL, its sponsor and single largest shareholder. Apart from cost over-runs, SIPL will support any increase in operation and maintenance (O&M) expense during the construction phase. SIPL will also meet any shortfall in debt servicing and increase in O&M expenses beyond the NHAI payout for O&M during the operational phase. SIPL has a portfolio of 12 build-operate-transfer, or BOT, projects (11 of which are operational and one is nearing completion), and a track record of supporting projects when required. Weakness: Moderate implementation risk, given nascent construction stage of project Construction work commenced in February 2017. The company is exposed to moderate implementation risk in the initial stage. However, SBHPL is a low complexity project where the implementation risk is mitigated to an extent by the fixed-price, fixed-time contract with, and strong project execution capabilities of, SEL. Any delay in project implementation will remain a rating sensitivity factor. Outlook: Stable SBHPL will benefit from substantial ROW and approvals as well as operational and financial support from sponsor SIPL. CRISIL expects SBHPL to complete the project within the budgeted time and cost, supported by project execution capabilities and fixed-time, fixed-price contract with SEL. The outlook may be revised to ‘Positive’ in case of early completion of the project within the budgeted cost and timely receipt of annuity. Conversely, the outlook may be revised to ‘Negative’ in case of delays in completion of project or any significant time and cost overruns. Click Here