The Government of India recently set a minimum rating requirement of ‘BBB’ for bidders of hybrid annuity model (HAM) and build-operate-transfer (BOT) toll road projects.

In case the rating is below this threshold, a comfort letter from banks/financial institutions is required to guarantee credit facilities (term loans).

This is to minimise risks associated with project implementation and defaults by developers. If implemented, the move would improve the risk profile of the sector.

The share of developers with a sub-BBB rating winning bids for HAM projects doubled from 4% in fiscal 2021 to 8% in fiscal 2023. Further, two-thirds of the HAM projects awarded to sub-BBB rated players between fiscals 2016 and 2018 are still under construction.

Moreover, developers with lower credit ratings generally entail greater financial and execution risks. Hence, the government move to set a minimum rating threshold for bidders is likely to mitigate risks linked to project execution.