Credit Rating Assignment Rating Procedure on Toll Road Industry Submitted by Dheeraj Singh Sujit Kumar Dharmesh Shharma Bipasha Ray Kartik Shetty
Credit Rating Assignment
Rating Procedure
on
Toll Road IndustrySubmitted by
Dheeraj Singh
Sujit Kumar
Dharmesh Shharma
Bipasha Ray
Kartik Shetty
Indian Road Sector - Overview
• India’s road network (3.3 Million Kms) is the world’s third largest.
• Road density - 770 Kms/1,000 sq Kms, against the world average of 840 Kms/1000 sq Kms.
• Country with diverse topographies and the world’s second largest population.
• The bid pipeline with projects worth around Rs 90,000 Cr, comprising approximately 13,000 Kms.
Sector Expected to Attract Investment of 6.3 trillion …..
• Investments of 6.3 trillion over the next 5 years (2010-11 to 2014-15) under various schemes
• Maximum investments from NH – Clarity in policy framework with changes in MCA, bidding policies.
National Highways
43
State Highways
30
Rural Roads
27
Investments in road sector (2010-11 to 2014-15)- Rs 6.3 trillion
per cent
(Rs 2.7 trillion)
(Rs 1.7 trillion)
(Rs 1.9 trillion)
Source: CRISIL Research
Policy Initiatives to Promote PPP…….
• Initiatives to upgrade and strengthen National Highways
through various phases of the NHDP
• NHAI - mandated to implement the National Highways
Development Project (NHDP).
• 100% FDI under the automatic route for road projects
• Viability Grant Funding - Entire VGF to be provided during construction period, maximum grant of 40% allowed(20% previously)
• Exit policy –permit complete disinvestment 2 years post completion of construction after obtaining NOC from lenders
CRISIL Rating Approach– Toll road projects
Rating factors for toll road projects
Construction phase risk
• Delays in construction phase impact the toll road project’s cashflows
and debt servicing capacity
• Key factors in assessing construction phase risk
– EPC contractor’s equity contribution in the project, past track record
– Clearances required and RoW from authority
– Schedule of construction work and land acquisition process
– Financial covenants for timely construction, including penalty payments by
contractors
• Promoter’s financial strength and ability to provide timely support, in
case of funding shortfall
Traffic risk
• Traffic forecast in terms of mix and volume on the toll road is key factor
– Traffic mix based on type of vehicle category
– Origin & destination and connectivity of road to important industrial and tourist areas
– Purpose and frequency of both passenger and freight traffic flow
• Correlation of traffic volume with the economic and industrial growth in the vicinity of toll road
• Seasonal variations in traffic flow such as festive period, post-harvest agricultural operations, etc
• Sensitivity analysis of impact of economic cycles and seasonal variations on traffic volume forecast
• Competition from parallel roads or other modes of transport on the same route
Toll risk
• Toll road user’s willingness to pay toll is an important factor in
determining toll revenues
• Ability to revise toll rates upwards as per concession agreement
– Acceptability by all users across vehicle categories
– Political influence/ local people tolerance to toll rate revision
• Toll collection efficiency
– Location of toll plaza and traffic diversion from parallel roads
– Minimum toll leakages
Structure of project SPV
• Legal and financial structure of the SPV
• SPV promoter’s technical capabilities, past experience and
commitment to the project
• Promoter’s financial strength and ability to raise additional funding
resources for the project, if required
• Forms of credit enhancement/ guarantees extended by the promoters
to the SPV
Legal or contractual risk/ Concession agreement
• Length of concession period and possibility of extension
• Concession period termination arrangements and payouts, in case of
event of default by either party
• Conditions for recourse to project lenders in case of specific events,
given that toll roads are on limited recourse basis
• Impact of ancillary land/ property development/ change in scope of
work on the project’s financial performance
• Provision for revision of toll rates –transparency, frequency and
quantum
• Clarity on role and responsibility of the parties
• Protection from construction of alternate roads, if any
• Provision for additional highway, if any
Financial analysis
• Assess cash flow adequacy for the project to meet its operation and maintenance charges and debt servicing obligations
– DSCR key determinant
– Liquidity support/Financial flexibility
• Key financial parameters under consideration– Toll revenues
– Debt Servicing Coverage Ratio (DSCR)
– Net cash accruals
– Extent of Debt Service Reserve Account for liquidity purpose
– Project gearing
– Traffic growth
– Toll rate revision
– Periodicity and quantum of Major Maintenance Expense
– O&M expense
• Stress testing cash flows for adverse economic developments impacting traffic flow or possibility of toll rate revision
• Financial flexibility in terms of accessing additional funding sources or support from government agencies/ promoters
Toll Road Industry – Traffic AnalysisCase Study – XYZ Co Ltd.
Traffic & toll revenue analysis (1/2)
• Traffic dependent on socio-economic conditions of Andhra Pradesh
– Hyderabad (IT hub and state capital) - major driver of freight and passenger traffic
movement
• Toll road protected from traffic diversion through build up of alternate road upto
August 2014
• Stable toll revenue generation of Rs. 1.1 million to Rs. 1.4 million per day
• Healthy growth in toll revenues of 20% yoy in 2010-11
• Upward toll rate revision of 11% yoy in Sept. 2010 – in line with the inflationary
environment
Traffic & toll revenue analysis (2/2)
Cars are the major traffic driver – single trip passenger traffic to Hyderabad Multi-axle vehicles (MAV) are the major drivers of toll revenue – single trip vehicular traffic on
account of freight movement between industrial areas and Hyderabad
Traffic volume mix
42% 45%
10% 11%
27% 23%
21% 21%
0%
20%
40%
60%
80%
100%
2009-2010 2010-2011
Cars LCVs 2-Axle Trucks/Buses Multi-Axle Vehicles (> 2 Axle)
Toll revenues
12% 17%7%
7%
34% 31%
47% 45%
0%
20%
40%
60%
80%
100%
2009-2010 2010-2011
Cars LCVs 2-Axle Trucks/Buses Multi-Axle Vehicles (> 2 Axle)
CRISIL Assumptions for Credit Assessment
CRISIL Assumptions
• Fixed interest rate of Eg; 9.75 per cent pa
• Cost of MMR incurred and time period of performing such MMR
• First major maintenance expense (MMR) to be incurred in 2013-14 and
2014-15 in the proportion of 25 per cent and 75 per cent respectively;
and thereafter with an interval of six years
• Maintenance of escrow account with following payment waterfall
– Dividend/other cash outflows to promoter/group companies to occur only after meeting
payment for taxes, O&M expenses, MMR expense, payout to investors, etc.
• Maintenance of debt service reserve account (DSRA) equivalent to debt
obligations for one quarter throughout the tenure of bonds
Credit Assessment
Key credit assessment drivers (1/2)
– Traffic drivers & toll revenues growth Impact of Economic Slowdown
Commercial or passenger traffic a major contributor to toll revenues
Ability to revise toll rates in line with increase in inflation
Traffic diversion risk from build up of alternate road/transport network
– Adequate debt protection measures Average DSCR of 1.4x over the debt payment tenure; DSCR below 1x in MMR
years
Healthy cash build up to provide liquidity support
Cash flows supported by escrow mechanism and DSRA
– Experienced sponsors Extensive group experience in infrastructure projects, including toll roads
Group track record in extending support to projects, in stress periods
Groups ability to win the bid for projects from NHAI or other State Authority
Rating Comparison in Toll Road Industry
Name of Entity Rating Gearing
OPBDITA
Net Margins ROCE Int-Coverage
Total Debt/OPBDITA
NCA/Total Debt
L&T
AAA 1.34 15.4 8.7 15.2 9.37 3.62 0.15GVK
AA+ 0.56 26.6 4.7 17.3 2.26 4.43 0.12NCC
AA- 0.68 10.5 4.9 15.2 2.49 0.16 0.16Viva
HighwaysA+ 1.1 75.8 49.9 22.0 4.39 2.15 0.31
Ramky
A 0.76 10.9 5.7 22.7 4.38 2.25 0.26Lanco
InfratechBBB+ 1.11 12.2 4.6 10.6 2.79 4.96 0.09
L&T GVK NCC Viva Highways Ramky Lanco Infratech0
10
20
30
40
50
60
70
80
15.4
26.6
10.5
75.8
10.9 12.2
OPBDIT
L&T GVK NCC Viva Highways Ramky Lanco Infratech0
0.2
0.4
0.6
0.8
1
1.2
1.41.34
0.56
0.68
1.1
0.760000000000001
1.11
Gearing
L&T GVK NCC Viva Highways RamkyLanco Infratech0
1
2
3
4
5
6
7
8
9
10 9.37
2.26 2.49
4.39 4.38
2.79
Interest Coverage
L&T GVK NCC Viva Highways Ramky Lanco Infratech0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
3.62
4.43
0.16
2.15 2.25
4.96
Total Debt/OPBDIT
L&T GVK NCC Viva Highways Ramky Lanco Infratech0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.150.12
0.16
0.31
0.26
0.09
NCA/Total Debt
L&T GVK NCC Viva Highways Ramky Lanco Infratech0
5
10
15
20
25
15.2
17.3
15.2
22 22.7
10.6
ROCE
Thank You