But recent government initiatives, lower interest rates can stem further slippage
A CRISIL Ratings analysis shows that around 7,500 km of highway projects -- 5,100 km under construction and 2,400 km operational – awarded mostly between fiscals 2010 and 2012 on a build, operate, transfer, or BOT, basis, are at high risk today.
Around 50% of the projects under construction are at high risk of not being completed because of significant cost over-runs and weak wherewithal of sponsors. We believe the remaining will benefit from proactive moves by the government to facilitate right of way and other clearances. We find the recent government move to ensure 80% right of way, or ROW, before a project is awarded very constructive.
Says Sudip Sural, Senior Director, CRISIL Ratings: “Under-construction projects require equity and cost-overrun support of around Rs 28,500 crore over the next two years. Of this, about Rs 16,000 crore could be stumped up from internal accrual of sponsors and sale of stake at the special purpose vehicle level. That leaves a significant shortfall of Rs 12,500 crore.”
As for operational highways, 26 out of the total 80 are in no position to service debt on their own because of lower-than-estimated traffic. These projects, which are mostly toll-based, span about 2,400 km, or 40% of total length of operational BOT highways, and have an outstanding debt of Rs 17,100 crore.
Operational highway projects have been facing cash-flow mismatches in the past few years because of lower-than-estimated traffic volume, and interest rates that were on the ascend till 2014. Now, with interest rates on the decline, pressure will ease a touch but debt service coverage ratios will remain less than 1 over the next two years. As a result, timely support from sponsors to bridge cash-flow mismatches will be critical because debt in these projects is without recourse to the sponsor.
Says Sushmita Majumdar, Director, CRISIL Ratings: “In the next two years, these projects require a toll revenue growth of ~40% in order to service their debt obligations. That’s a tough ask considering that toll rates are linked to WPI inflation, which is in negative territory. And traffic has just started to inch up and is yet to reach double digits in most cases.
”To be sure, the government has announced a raft of policy measures to help both highway projects and their developers. Of these, the removal of restriction on exit clause alone can allow developers to sell stakes in some projects and raise about Rs 5,000 crore. These funds can be used to turn around stressed projects, meet existing commitments and also as growth capital. A change of promoter in projects sold could also open up access to better refinancing terms and further financial support. Similarly, developers with operational projects can also securitise receivables to either raise additional debt to support fund commitments or to improve project viability by realigning debt repayment and reducing cost of borrowing. Around Rs 15,000 crore of debt can be refinanced through capital market including through Infrastructure Debt Funds, or IDFs.
CRISIL believes that the steps taken towards ensuring right of way and other clearances prior to project award, and tapping the funding avenues available at the disposal of the developers will help straighten out the future of India’s highway sector.
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CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.
About CRISIL Ratings
CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a traditionof independence, analytical rigour and innovation, we have a leadership position. We have rated over 75,000 entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range of debt instruments: bank loans, certificates of deposit, commercial paper, non-convertible debentures, bank hybrid capital instruments, asset-backed securities, mortgage-backed securities, perpetual bonds, and partial guarantees. CRISIL sets the standards in every aspect of the credit rating business. We have instituted several innovations in India including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We pioneered a globally unique and affordable rating service for Small and Medium Enterprises (SMEs).This has significantly expanded the market for ratings and is improving SMEs' access to affordable finance. We have an active outreach programme with issuers, investors and regulators to maintain a high level of transparency regarding our rating criteria and to disseminate our analytical insights and knowledge.