TOT Model Poses High Refinancing Risk; Approach Needs to be Revamped

India Ratings and Research (Ind-Ra) opines that bidders for toll-operate-transfer (TOT) projects may find it difficult to tie-up debt, as the debt tenor in India is typically 10-15 years. Also, such projects pose a huge refinancing risk, as the initial concession period is 30 years. Furthermore, with such long concession period, the initial estimated concession value (IECV) is bulky, requiring large debts and thus large interest payments, which would be a burden on the bidder during initial years until the project achieves significant ramp up in revenues.

Ind-Ra however believes a reduction in the concession period by five to seven years would bring down IECV, thus lowering the quantum of interest payments during initial years. A reduction in concession period would also help the concessionaire to mitigate refinancing risk to a certain extent.

Ind-Ra believes that the predictability of cash flows for a horizon of 30 years is a daunting task, as toll revenues and operation and maintenance expenses may vary depending upon economy, Wholesale Price Index and Consumer Price Index etc. The investors and the lenders will have to be a little cautious on this model for the first bundle of projects, so as to structure the debt in such a way that in initial years the return on equity is higher before debt payment.

Ind-Ra expects the equity internal rate of return to be in the range of 13.5%-14.5% which hinges on the revenue estimate for the first year i.e. FY19 and the subsequent traffic growth rate. Depending upon the risk appetite of bidders, the first bundle might attract bids within 10% of IECV. The bids would be more competitive and with less variance since six out of nine assets to be bid under the TOT model are part of the Golden Quadrilateral and other three are in industrial clusters. More than 50% of assets have an average vintage of 10 years, enabling bidders to bid based on actual toll collections, routine operations and major maintenance expenses.

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