Detailed Rationale

CRISIL Ratings has reaffirmed its 'Provisional CRISIL AAA/Stable' rating on the long-term bank facility of Bharat Highways InvIT (Bharat InvIT), an infrastructure investment trust of roads sector assets. This takes into account the announcement by G R Infraprojects Ltd (GRIL; 'CRISIL AA/Stable/CRISIL A1+') dated November 30, 2022, to discontinue to act as the sponsor and project manager of Bharat InvIT; GRIL will be replaced by Lokesh Builders Pvt Ltd (LBPL), which is held by the promoter family of GRIL. LBPL will acquire 15% units in the InvIT. The rationale for the said internal restructuring is to segregate the non-core business activities of GRIL from its core business operations of EPC construction and expand its business operations in infrastructure sector. The investment manager had intimated SEBI regarding change in sponsor, project manager and change in shareholding of the investment manager and has received communication to proceed with the said changes in the InvIT structure.

 

LBPL is the largest shareholder (31.8% as on October 20, 2022) of GRIL. All the shareholders of LBPL are from the promoter family of GRIL. Change in structure is unlikely to impact the credit rating of Bharat InvIT. All the contracts, including O&M (operations and maintenance) and major maintenance, will be entered back-to-back with GRIL, whose promoters will remain sponsors but through another investment company. In the revised structure, the sponsor will be LBPL with GR Highways Investment Manager Pvt Ltd as its investment manager (100% holding of LBPL), LBPL as the project manager, and IDBI Trusteeship Services Ltd as the trustee.

 

The rating continues to reflect the strong and diversified portfolio of hybrid annuity road assets¹ proposed to be transferred to the trust by GRIL. The portfolio has healthy revenue visibility, supported by operational track record of receiving at least two annuities from the National Highways Authority of India (NHAI, rated 'CRISIL AAA/Stable') for all underlying assets (except one that received PCOD on August 2, 2022). It also reflects the fixed price O&M and major maintenance contracts with LBPL, which will enter into back-to-back agreement with GRIL. These, coupled with adequate leverage, will result in strong debt protection metrics. As a large part of debt is proposed to be in Bharat InvIT, the debt-servicing ability will be strengthened by cash flow pooling from all the projects. As per the proposed terms, the debt is expected to be capped at 49% of the trust valuation till the first six distributions, which can be subsequently increased to 70% subject to compliance with InvIT regulations. The initial portfolio is estimated to have comfortable leverage of 40-45%. Additionally, terms in the proposed financing documents stipulate maintenance of debt service reserve account (DSRA) equivalent to one quarter debt servicing, thereby providing liquidity cushion. The rating also derives strength from the experience of GRIL in managing and maintaining road assets.

 

These strengths are partially offset by susceptibility to volatility in interest rates and exposure of debt service coverage ratio (DSCR) to future acquisitions.

 

¹The trust will have an initial portfolio of 7 HAM (hybrid annuity model) assets.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Bharat InvIT with its underlying special-purpose vehicles (SPVs) as the trust is expected to have direct control over these SPVs. The entire proposed debt is expected to be taken at the InvIT level. The debt, along with fresh equity infusion, will then be lent to the proposed SPVs as shareholder loans and will be utilised towards retiring existing external debt (apart from Rs ~800 crore of NCD [non-convertible debenture] that will continue till September 2024). The debt at InvIT level will be serviced from cash flows up-streamed from the underlying SPVs. The DSCR testing for the restricted payment conditions would be at the Bharat InvIT level. Also, as per the financing terms, the cap on borrowings has been defined at a consolidated level; aggregate consolidated borrowing for the InvIT and its SPVs is restricted at 49% of the valuation till the first six distributions, which can be subsequently increased to 70% subject to compliance with InvIT regulations. 

 

Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Healthy operational track record of assets with strong counterparty

The portfolio comprises 7 HAM assets, of which 6 are operational while GR Dwarka Devariya Highway Pvt Ltd (GDDHPL) received its PCOD on August 2, 2022 (right of way of 94.23% and physical progress of 90.12% as per IE report as on September 30, 2022). These assets have an operational track record of 0-2.5 years and are located across Gujarat (27%), Uttar Pradesh (25%), Maharashtra (18%), Andhra Pradesh (17%) and Punjab (13%), thereby providing geographical diversification. Additionally, no HAM asset is contributing more than 25% to the total annuity of the InvIT, and the balance concession period for the 7 assets (12.5-15 years) will provide long-term cash inflows to the InvIT.

 

The counterparty of all the assets is NHAI and the outlook on it reflects the outlook on the sovereign, which reduces counterparty risk. Additionally, due to the inherit benefits of HAM projects, the traffic risk has been assumed by NHAI, which provides stability and predictability in cash flows.

 

GR Phagwara Expressway Ltd (GPEL) has a track record of 5 annuities till date, while Porbandar Dwarka Expressway Pvt Ltd (PDEPL) has received 4 annuities and Varanasi Sangam Expressway Pvt Ltd (VSEPL) 3 annuities. GR Akkalkot Solapur Highway Pvt Ltd (GASHPL), GR Sangli Solapur Highway Pvt Ltd (GSSHPL) and GR Gundugolanu Devarapalli Highway Pvt Ltd (GDHPL) have received 2 annuities each. The annuity payments from the six HAM assets have been received without any substantial delay or material deduction. All projects have a debt-annuity ratio of 50-70%, making these favourably leveraged.

 

Strong debt protection metrics

Financial risk profile is expected to be healthy, supported by comfortable average DSCR of 2 times throughout the tenure of the debt. This is on account of fixed annuity payments and moderate leverage of Rs 2,700 crore expected at the trust level. As a large part of the debt is to be at the trust level, debt servicing will be supported by cash flow pooling of all projects under the InvIT structure. Due to the fixed nature of the annuities and a strong counterparty, all cash inflows (annuity payment from NHAI), interest on remaining annuity and inflation-adjusted O&M payment from NHAI to the InvIT are expected in a timely manner; leading to strong debt-repayment capacity.

 

As on August 31, 2022, total debt in the 7 HAM projects was Rs 3,822 crore (Rs 2,575 crore as rupee term loan and Rs 1,247 crore as NCD). With Rs ~200 crore expected to be drawn in GDDHPL, total debt is likely to reach Rs ~4,000 crore. The InvIT plans to refinance debt of Rs ~1,900 crore at a lower interest rate and raise Rs ~1,400 crore as fresh issuance from the market to prepay debt of Rs ~1,300 crore. This will result in Rs ~2,700 crore of debt outstanding (Rs ~1,900 crore of term loan at the InvIT level and Rs ~800 crore of NCD at the SPV level) after listing of the InvIT. The InvIT plans to refinance the NCD in fiscal 2025. A liquidity cushion is also built into the proposed debt terms in the form of one quarter DSRA.

 

As per the InvIT guidelines (also built into the draft term sheet), debt must not exceed 49% of the asset value (until six consecutive dividend distributions). The initial portfolio is estimated to have comfortable leverage of 40-45%. CRISIL Ratings believes the DSCR for the rated debt instruments is strong and is expected to remain well above the covenants throughout the debt tenure, supported by fixed annuity payments and moderate leverage.

 

Experienced management team

Bharat InvIT will benefit from the strong asset management ability of LBPL and GRIL (an associate of LBPL), which have longstanding presence in the infrastructure space with experience of over 25 years in design and construction of various road/highway projects across 16 states in India. GRIL has also completed more than 100 road construction projects since 2006. Apart from EPC (engineering, procurement and construction) projects, GRIL also has a portfolio of 23 road projects of which 8 are operational, 7 are under-construction and appointed dates are awaited for the remaining 8 projects. In addition to these, GRIL has 1 under-construction transmission project. Order book as on June 30, 2022, stood at ~Rs 17,005 crore of which around 92% belongs to NHAI.

 

Fixed-price, long-term O&M agreement provides support

Till date in all the 6 operational SPVs, O&M payments have come from NHAI without any major deductions. Furthermore, O&M expenses are inflation adjusted with 70% weight to WPI and 30% weight to CPI, thereby providing cushion and reducing overall variability in O&M payments. The HAM assets that are proposed to be acquired will  execute fixed-price O&M and major maintenance contracts with LBPL. In turn, LBPL will enter into back-to-back arrangement with GRIL for the entire concession period with a clause of fixed price for the first seven years, after which the price will be mutually renegotiated. Any change in this arrangement and higher than expected O&M costs in actual agreement will be key monitorables. The fixed-price contract provides the first level of cushion in terms of stability of cash flows. Any increase in O&M higher than that stipulated in the agreement will be borne by GRIL, resulting in lower volatility in cash flows of the InvIT.

 

However, actual O&M for operational assets has been between Rs 3.3 lakh per km (kilometre) to 14.2 lakh per km (lower than CRISIL Ratings estimates). Therefore, if the maintenance costs are lower than expected after 7 years, the costs can be revised downwards.

 

Weakness:

Susceptibility to volatility in interest rates and possibility of debt-funded acquisitions

Any reduction in the bank rate can impact the DSCR given that a large proportion of the cash inflow is from the interest on balance annuities. Furthermore, as operation cost depends on inflation and the proposed rupee term debt has a floating interest rate with monthly reset linked to benchmark, any significant increase in these components could impact cash flow. However, coverage indicators will be safeguarded to a certain degree due to a natural hedge as the movement in interest rate on borrowings that are linked to external benchmark, and the interest on annuities that are linked to bank rate shall move in the same direction.

 

Furthermore, the management also plans to add additional operational HAM assets in the InvIT, though its philosophy is to acquire only operational HAM or Annuity assets in InvIT will provide stable returns. But any acquisition of under-construction assets or of weak assets with large debt and low revenue potential, or leveraged acquisition of operational HAM assets impacting DSCR on sustained basis will remain a rating sensitivity factor.

Liquidity: Superior

Expected timely annuity receipts of Rs 6,500 crore over the next 15 years will be adequate to meet operational expenses and debt obligation. Average DSCR is expected to be comfortable at 2 times and cushion in annuity receipts is provided by a strong counterparty with no substantial delay in annuities for any of the operational assets. Furthermore, a DSRA equivalent to three months of interest and principal obligation will be maintained. Liquidity will also be supported by dividend flow from the SPVs to the InvIT over the course of 15 years.

Outlook: Stable

Bharat InvIT is likely to continue to benefit from the steady revenue from the 6 operational HAM assets and the  PCOD receipt of one asset, backed by strong counterparty and predictable expense and mitigants to O&M and major maintenance-related risks.

Rating Sensitivity Factors

Downward factors

• Substantial delay in receipt of annuity and considerable deduction in annuities and O&M payments in any asset
• Higher-than-expected incremental borrowings or acquisition of weak assets with high large debt and low revenue potential impacting average DSCR
• Non-adherence to the structural features of the transaction
• Non-maintenance of adequate liquidity reserves in the form of DSRA
• Any adverse changes in regulation or significant deterioration in credit profile of counterparty

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following:

• Completion of the offer and listing of the InvIT
• Transfer of the shareholding in the proposed SPVs to the InvIT
• Refinancing of the existing debt at underlying asset SPVs with proposed debt

The 'provisional' rating shall be converted into a final rating after receipt of transaction documents duly executed and confirmations on completion of pending steps within 90 days from the date of completion of offer through which the InvIT completes its fundraising and issues units.

The 'final' rating assigned post conversion shall be consistent with the available documents and completed steps. In case of non-completion of steps or non-receipt of the duly executed transaction documents within the specified timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days in line with its policy on provisional ratings.

The broad details of the assets that are proposed to be held by are as follows:

 

GR PHAGWARA EXPRESSWAY LIMITED ('GPEL')

GPEL is an SPV incorporated on September 21, 2016, for the four laning of Phagwara to Rupnagar section of NH-344A from km 0.00 (design chainage) to km 80.820 in Punjab under HAM. The project received PCOD on February 25, 2020, and COD on May 26, 2021, and has a track record of receiving 5 annuities till August 31, 2022.

 

PORBANDAR DWARKA EXPRESSWAY PRIVATE LIMITED ('PDEPL')

PDEPL was incorporated on June 10, 2017 and promoted by GRIL for four-laning of the Porbandar-Dwarka section of National Highway 8E in Gujarat from 356.786 km to 473.000 km (a stretch of 116.214 km) on a design, build, finance, operate, and transfer basis under HAM. The project received PCOD on April 18, 2020, and COD on October 13, 2021, and has a track record of receiving 4 annuities till August 31, 2022.

 

VARANASI SANGAM EXPRESSWAY PRIVATE LIMITED ('VSEPL')

VSEPL was incorporated on April 18, 2017, and promoted by GRIL for six-laning of Handia to Varanasi section of NH-2 from km 713.146 to km 785.544 in Uttar Pradesh under NHDP Phase V. The project received PCOD on November 2, 2020, and has a track record of receiving 3 annuities till August 31, 2022.

 

GR AKKALKOT SOLAPUR HIGHWAY PRIVATE LIMITED ('GASHPL')

GASHPL was incorporated on April 27, 2018 and promoted by GRIL for four-laning of Akkalkot - Solapur section of NH-150E in Maharashtra with paved shoulders from design chainage km 99.400 to km 138.352/existing chainage from km 102.819 to km 141.800 (design length 38.952 km), including Akkalkot bypass (design length 7.350 km). The project received COD on March 31, 2021 and has a track record of receiving 3 annuities till October 18, 2022.

 

GR SANGLI SOLAPUR HIGHWAY PRIVATE LIMITED ('GSSHPL')

GSSHPL is a special purpose vehicle incorporated on 27th April, 2018 and promoted by GRIL for Four-laning of Sangli - Solapur (Package- III: Watambare to Mangalwedha) Section of NH-166 from existing Ch. Km 272.394 to Ch. km 314.969 (Design Ch. km. 276.000 to Ch. km. 321.600). The project received PCOD on 28th June, 2021 and has track record of receiving 3 annuities till 31st August, 2022

 

GR GUNDUGOLANU DEVARAPALLI HIGHWAY PRIVATE LIMITED ('GDHPL')

GDHPL was incorporated on March 28, 2018, and is promoted by GRIL for four-laning of the Gundugolanu - Devarapalli - Kovvuru section of NH-16 from km 15.320 (existing km 15.700) to km 85.204 (existing km 81.400) in Andhra Pradesh under Bharatmala Pariyojana. The project received PCOD on July 10, 2021, and IE has recommended COD effective from September 30, 2022. It has a track record of receiving 2 annuities till August 31, 2022.

 

GR DWARKA DEVARIYA HIGHWAY PRIVATE LIMITED ('GDDHPL')

GDDHPL was incorporated on March 26, 2019, and is promoted by GRIL for four-laning of Dwarka (Kuranga) - Khambhaliya - Devariya section of NH 151A in Gujarat under Bharatmala Pariyojana. The project received PCOD on August 2, 2022.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending steps/documentation considered while assigning the provisional rating as mentioned above, CRISIL Ratings would not have assigned any rating

Risks associated with the provisional rating

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Company

Bharat InvIT is an infrastructure investment trust of roads sector assets sponsored by LBPL (replaced from GRIL), with GR Highways Investment Manager Pvt Ltd as its investment manager, LBPL as the project manager and IDBI Trusteeship Services Ltd as the trustee.

 

The InvIT received registration certificate from the Securities and Exchange Board of India on August 3, 2022,.Subject to the receipt of requisite approvals, the InvIT intends to acquire 100% of the equity shares in each of the project SPVs (except GDDHPL, in which it initially plans to acquire 49%) from GRIL (an associate of the sponsor). The InvIT will issue units to GRIL on the acquisition date pursuant to the share purchase agreements.

 

As on August 31 2022, the project SPVs had total outstanding external borrowing of ~Rs 3,830 crore. The InvIT plans to utilise about Rs 2,700 crore from debt facilities proposed to be raised along with issue proceeds towards repayment/pre-payment of certain outstanding loans, including any interest accrued and prepayment penalty thereon. The InvIT plans to raise fresh capital of Rs ~1,300, after which the shareholding of GRIL will come down to ~60%.

Key Financial Indicators

As on/for the period ended March 31	Unit	2022	2021
Revenue	Rs crore	NA	NA
Profit After Tax (PAT)	Rs crore	NA	NA
PAT Margin	%	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA
Interest coverage	Times	NA	NA

Past financial data is not available as the company has recently been registered and assets are yet to be acquired