• 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. 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
Rating factors for toll road projects Traffic risk Construction Toll risk phase risk Overall credit rating Structure of Financial project Special analysis Purpose Vehicle (SPV) Legal or contractual risk / Concession agreement
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 Analysis Case 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) Traffic volume mix Toll revenues 100% 100% 21% 21% 80% 80% 47% 45% 27% 23% 60% 60% 10% 11% 40% 40% 31% 34% 20% 42% 45% 20% 7% 7% 12% 17% 0% 0% 2009-2010 2010-2011 2009-2010 2010-2011 Cars LCVs 2-Axle Trucks/Buses Multi-Axle Vehicles (> 2 Axle) Cars LCVs 2-Axle Trucks/Buses Multi-Axle Vehicles (> 2 Axle)Cars are the major traffic driver – single trip passenger traffic to HyderabadMulti-axle vehicles (MAV) are the major drivers of toll revenue – single trip vehicular traffic on account of freight movement between industrial areas and Hyderabad
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
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