Lenders, promoters of highway projects redo maths

Lenders to KMP Expressways, a road project in Haryana being developed by DSC Ltd, are known to be considering restructuring a Rs 1,146-crore loan to it. The company, which also manages the Delhi-Gurgaon Expressway, said there had been a delay in project completion, forcing the restructuring.

A senior public sector bank official discussing this proposal is expecting many such is ideas to land on his desk. For, there are other highway projects going through this. Hyderabad-based IVRCL has applied for restructuring of loans to two of its road projects, Kumarapalayam Tollways and Salem Tollways. Lower than expected traffic growth is the reason.

Many more projects, financially closed in 2007 and 2008, are falling short of the estimates made at the time of bidding. “A number of projects which have become operational in the past 12-24 months are suffering from traffic under-performance in the critical ramp-up phase of the first six to 18 months of operations,” said S Nandakumar, senior director, Fitch Ratings. Not enough traffic on these roads, and inadequate cash flows are making it tough to meet debt service requirements.

The chief financial officer of a toll roads company said they were making a request to lenders to reduce the size of instalments of the loan to be paid. “We did not expect a slowdown when we made these estimates. But we can more than make up for the downfall in the next two-three years. So, we asked the lenders to increase the instalments when traffic growth goes up. That way, the end payment will not be disturbed,” he said.

Sector experts, however, say there is little chance of future growth making up for the lower growth. “Even if year-on-year traffic growth rates conform to or exceed original assumptions, if the first year's traffic is substantially lower than expected, then the project will have to play catch-up with the initial revenue forecasts for the remaining life of the debt, if not the entire life of the concession,” said Nandakumar.

The agency, in recent months, has downgraded a number of road projects. However, not all of them are going for restructuring. IRB Surat Dahisar Tollways was also downgraded in June, with a negative outlook. The company's chairman, Virendra Mhaiskar, said they were not going for restructuring. “The project has progressed faster than expected and that has helped us,” he said.

It’s not just traffic affecting these projects. Rising interest rates are also playing spoilsport. A number of the loans in trouble were approved and disbursed in 2007 and 2008, when interest rates were at nine per cent. They’re now 13.5 per cent.

Vikash Sharda, senior manager at PriceWaterhouseCoopers, believes there would be more such cases going forward, for a variety of reasons.

“In some cases, there are delays in land acquisition; in some, there are cost overruns,” he said.

This is an offshoot of the extra competition in the sector, where companies under-bid on projects, to bag these. “There could be cases of some of these loans being converted into equity, if the entire debt cannot be restructured,” said Sharda.

There is a silver lining. The higher rates of inflation would allow roads to increase toll rates at a higher percentage.

During the financial closures of these projects, many were estimated at much lower inflation rates. “This might offset partially the impact of slower growth in traffic volumes on project revenue,” said Nandakumar.