Ind-Ra: Highway Projects Worth INR255bn May Be Under Stress

Around INR255bn of project level debt across 37 highway projects, both under construction and completed projects that were bid out by National Highways Authority of India's (NHAI: 'IND AAA'/Stable) may be under stress, says India Ratings and Research (Ind-Ra). Ind-Ra has identified stressed projects based on the sponsor credit profile, existing credit metrics of the projects and the ability for funding at the sponsor or project level.

Ind-Ra's analysis highlights that out of the total projects bid out by NHAI, sponsors of around 102 projects could have limited flexibility to support projects if the need arises. Of these, the credit profiles of 37 projects (29 Projects under BOT Toll & 8 Projects under BOT Annuity) may be under stress, unless these projects undergo any structural transformation. Out of the 102 projects, around 54% of these are under implementation and the cumulative length of the potentially stressed assets is 3,360kms.

The strain which is visible in the cash flow of highway projects, as highlighted in 'Refinancing, Risk-balancing Could Steer Highway Sector Out of Troubles', is primarily due to the unfavourable macro-economic conditions, slippages from the original project timelines, lower traffic performance and higher debt levels. Ind-Ra believes the credit metrics for these projects' are unlikely to improve substantially, unless the projects undergo structural changes, in terms of additional money infused by the sponsor which is difficult, or by way of debt restructuring or refinancing.

The outstanding rating of at least 20 of these projects is currently Default (by various agencies), while the balance projects have a non-investment grade rating. The projects under the latter is what Ind-Ra believes are at risk of default.

The existing debt levels of projects further compounds the problems of the sector already saddled with a plethora of issues. Ind-Ra's analysis reveal that projects are 19% over leveraged over FY17-FY25 to meet the lenders' restrictive covenants of 1.2x debt service coverage ratio. In case the over leverage is not reduced it could lead to the project breaching the restrictive covenants embedded in the financing agreements. In the absence of a major maintenance reserve creation this could lead to re-gearing for meeting the life cycle costs, especially with limited ability of the sponsors to infuse funds when it falls due.

The banking sector's exposure to the highway sector, declined to 7.1% in FY16 from 7.7% in FY15 (INR1.79trn compared to INR1.67trn). Ind-Ra expects the trend of the decline in banks' exposure to the highway sector to continue in the medium term owing to the higher level of possible risk.

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