Prudent hybrid model bids for highways keep debt levels viable: Crisil

Lenders to highway projects based on hybrid annuity model (HAM) have debt levels in the safe zone as developers are bidding prudently, credit rating agency Crisil said today.

In order to fast-track highway projects, revive the Public-Private-Partnership (PPP) mode and attract more investments to the sector, the government had approved HAM under which it provides 40 per cent of the project cost to the developer to start work while the remaining investment is made by the developer.

"With banks extremely cautious and shying off projects not backed by experienced sponsors with strong financials, developers with healthy financials are the ones vying for HAM projects, which is keeping bids prudent," Crisil Ratings said in a statement.

Given this, the average debt service coverage ratio remains comfortable at around 1.15 times for most of these projects which have a low risk in the operations phase, it added.

Sachin Gupta Senior Director, Crisil Ratings said, "Banks are limiting their exposure to 35 per cent compared with 70 per cent in the traditional build-operate-transfer or BOT projects.

"NHAI contributes 40 per cent of the costs, so the gap in funding is expected to be closed by the sponsor. Additionally, banks are seeking corporate guarantees for a large number of projects to safeguard their interests.

The rating agency said the mod has kept the bids prudent as the bid project cost (BPC) per km has remained in the range of Rs 23-25 crore.

"Further, L1 (lowest) bids are on average 15 per cent higher than NHAI's estimated engineering, procurement and construction, or EPC, costs, though the difference between L1 and L2 bidders has doubled to 8 per cent last fiscal from 4 per cent in fiscal 2016.

"The number of bidders, too, remains limited at 5-10 per project compared with almost 30 seen for BOT projects in fiscals 2011 and 2012," the statement said.

It said another factor responsible for the bidding prudence is government's road development agenda under Bharatmala being quite large, with high visibility of projects - 35,000 km valued at Rs 5.35 lakh crore to be implemented over 5 years.

This is likely to obviate desperation to grab projects.

The agency said HAM has become the preferred contract for the National Highways Authority of India (NHAI) in just three years of launch, rising from less than 10 per cent (Rs 7,700 crore) of awards in fiscal 2016 to nearly 50 per cent (Rs 76,500 crore) in fiscal 2018.

Going forward too, HAM projects are expected to be constitute 60 per cent of the projects awarded by NHAI, it said.

Overall, from a credit perspective, the bidding so far seems prudent with the right funding mix, it added.