The debt servicing ability of road projects would be under strict watch over the next few months, as the impact of demonetisation on the cash flows becomes clear, say credit rating agencies.
Although the National Highways Authority of India (NHAI) has authorised its regional officers to make payment covering 90% of the interest amount provided in the financial/refinancing package to the concessionaires on submission of the required documents, this would remain inadequate, say analysts.
Shubham Jain, vice president, ICRA said, “Unlike annuity road projects, wherein the principal repayment falls due on semi-annual basis, majority of the toll road projects have monthly debt-repayment frequencies. With only interest cost and operations and maintenance expenses getting compensated, the compensation will be inadequate from the debt servicing point of view, unless the project has DSRA or other cash reserves to fall back on”. However, Jain said that the projects with DSRA constitute a very small percentage of the operational projects and hence the credit impact on the sector can be substantial.
Jain told FE that there might be instances where concessionaires missed their November payments. “We are monitoring these developments and there could be some rating actions over the next one week,” he said.
In a statement last Friday, ICRA observed that the proposed compensation mechanism based on O&M and interest costs, could lead to disputes with developers given the huge revenue loss for them. Last month, the rating agency had pegged the loss in toll revenues resulting due to demonetisation at Rs 460 crore for the first 10 days of stoppage of toll collection. This was for around 115 toll projects having an average daily collection ranging around Rs 40 lakh.
“The loss owing to 23 days of no toll collection would have crossed Rs 1,000 crore,” Jain added.
Meanwhile, there is still lack of clarity over how long will it take for the compensation to reach the developers. Ajay Srinivasan, director, CRISIL Research said there is still no clarity over when will NHAI compensate the road developers. “The loss of toll revenues for the month when the toll collections were stopped will pose a constraint for road projects. Therefore, actual timing of release of payments from the authorities for the loss of cash flows of projects is what we are watching out for at the moment”.
The developers will apply for compensation under the change in law provision provided in the concession agreements and may also ask for extending the concession period by the number of days such change was applicable.
However, in times of uncertainty sponsors’ ability to bail out the project from cash flow shortfall to meet its debt repayment obligations will be tested. Given that a significant number of projects continued to languish despite the uptick in traffic seen in the last two years, not many sponsors will be in a position to support the projects if required.
A recent report by CARE Ratings suggested that quantum of sponsor support required in FY17 is expected to increase to some extent in 43% of the 67 operational projects with outstanding debt of around R15,150 crore and length of 12,000 lane kilometres. Further, 28% projects with length of 3,700 lane kilometres and debt of R6,900 crore are owned by sponsors with moderate to weak credit quality and will require sponsor support.
However, apart from the short term pain, the impact of slowdown in economic activity post-demonetisation is likely to constrain the cash flows of these roads for a bit longer, say analysts. Srinivasan said that whether the developers can claim the impact of demonetisation on the lower commercial vehicle traffic under change of law provision is also being looked into by the developers.
There are already indications that the toll collection growth will be much lower compared to the last two financial years. CARE Ratings observed that the toll collection growth is likely to be moderated to 6-7% in the financial year ended March 31, 2017 due to subdued economic activity post demonetisation. This is in stark contrast to the growth of 11% and 11.25% witnessed in average daily toll collections during FY15 and FY16 respectively despite subdued hike in toll rates. Darren Woodson Jersey