The country relaxed the exit policy for road projects under public-private partnership (PPP) model in May 2015. The move is showing results, with a higher amount of deals seen in the road sector in the last two years, according to rating agency ICRA Ltd.
The rise in deals, however, may not have brought cheer to a good number of road projects’ sponsors as the ICRA data suggest 31 per cent of the deals in the last two years were made at a loss to the investor.
“In about 31 per cent of the transactions, the return to the developers is negative, indicating loss on investment. Developers with a weak credit profile are the ones who disposed of their assets at a loss as liquidity took precedence over profit-making for them,” said K Ravichandran, senior vice-president and group head, corporate ratings, ICRA.
On Wednesday, the rating agency said, “Sponsors in around 20 road assets involving a total cost of Rs 12,327 crore have monetised their assets as opposed to around Rs 7,000 crore in the preceding 50 months.” The report attributed the rise to relaxation seen in the exit policy for road projects. In May 2015, the Cabinet Committee on Economic Affairs (CCEA) relaxed the exit policy for projects awarded before 2009, allowing 100 per cent equity divestment by the developers as against 74 per cent earlier.
Of the 20 road assets sold, three were state road projects and the remaining are national highway projects. “Of 17 national highway projects, 16 were awarded before 2009 and are the direct beneficiaries of the policy decision on relaxation of the exit policy for projects awarded before 2009 in May 2015,” ICRA said in its note.
ICRA added the relaxation in the policy not only attracted private equity players that are more comfortable when they own 100 per cent stake in the projects, but also enabled the unlocking of additional 26 per cent of the developers’ equity invested in about 5,600 km of national highway projects, awarded under PPP. “This could result in freeing up of around Rs 4,500 crore of equity, which could support equity contribution towards the construction of 1,500 km of national highways in PPP mode,” according to ICRA.
The report named Brookfield Asset Management (Canada), Canadian Pension Funds, Macquarie (Australia), I Squared capital (USA, Cube Highways), Abertis Infraestructuras (Spain) and IDFC Alternatives as the major investors currently looking for assets in the sector. There is a strong case for these funds to look at road assets as Ravichandran in the ICRA note added,”The ones with highest returns were secondary sale transactions wherein the sponsors are private equity investors. With the increase in WPI and the continued healthy growth in traffic, the toll collections are expected to grow by 10-11% over the next two years.” ICRA expects the asset sale transactions to gather further momentum as the valuations have improved following a favourable outlook on toll collections and decline in interest rates.
Shubham Jain, Vice President and Sector Head, Corporate Ratings, points out those who might gain from this improved momentum for asset sale are projects with at least five to seven years of operational track record. “Projects awarded before 2009 are ideal candidates for the asset sale. The M&A opportunities in the road sector are the highest among various infrastructure sub-sectors with around 88 operational National Highways projects totalling 7,192 km with a total project cost of Rs.69,327 crore and median operational track record of four years,” Jain said. Paul Kariya Authentic JerseyShare This