Detailed Rationale

CRISIL Ratings has upgraded the rating on the long-term bank facilities of six of the nine toll road special-purpose vehicles (SPVs) of Macquarie Asia Infrastructure Fund 2 (MAIF 2), namely Siddhantham Tollway Pvt Ltd (STPL), Garamore Tollway Pvt Ltd (GTPL), Icchapuram Tollway Pvt Ltd (ITPL), Diwantham Tollway Pvt Ltd (DTPL), Ankapalli Tollway Pvt Ltd (ATPL) and Diwancheruvu Tollway Pvt Ltd (DCTPL) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’. CRISIL Ratings also upgraded the rating on the long-term bank facilities of the other three SPVs, Bamanbore Tollway Pvt Ltd (BTPL), Porbandar Jetpur Tollway Pvt Ltd (PJTPL) and Puintola Tollway Pvt Ltd (PTPL) to ‘CRISIL AA (CE)/Stable’ from ‘CRISIL AA- (CE)/Positive’

 

CRISIL Ratings had introduced the 'CE' suffix for instruments with an explicit credit enhancement feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

 

The nine SPVs, referred to as the MAIF 2 Road SPVs, are part of the first toll-operate-transfer (TOT) package awarded by the National Highways Authority of India (NHAI) in March 2018.

 

The upgrade factors in resilient performance of the portfolio assets during the pandemic with toll collection for fiscal 2021 recording growth of around 9% over fiscal 2020 despite lockdowns. Further, the stretches demonstrated adequate recovery in toll collection post second wave of COVID-19 and the traffic is expected to report moderate growth over the medium term. The toll collection was impacted in the month of May 2021 as states started imposing curbs with rise in COVID cases. However, the impact on the nine MAIF 2 Road SPVs was low and toll collection in June 2021 showed marginal growth than pre-covid levels. These stretches connect major industrial centres and ports in Andhra Pradesh (AP) and Gujarat. Further, 75% of revenue is derived from six AP stretches which are part of Golden Quadrilateral (GQ) route.

 

The toll collection in fiscal 2021 was supported by significant increase in traffic volume in two stretches of AP due to diversion of traffic from the parallel stretch. Traffic in the two AP stretches started normalising from January 2021 and are expected to normalise further in fiscal 2022 with completion of competing stretch. However, given the strong traffic potential of the nine stretches and annual toll rate increase, toll revenue growth is expected to be 8-10% over the medium term which would keep the average debt service coverage ratio (DSCR) at comfortable levels. Any significant and sustained impact on traffic leading to lower than expected revenue will remain a rating sensitivity factor.

 

The ratings continue to reflect the healthy debt protection metrics of the SPVs backed by the strong traffic potential of the project stretches and healthy capital structure. The ratings also factor in the strong and experienced sponsor, large cash and bank balance, and adequate liquidity support through debt service reserve account (DSRA) and the presence of a co-obligor structure. These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume and the risk of higher-than-expected operations and maintenance (O&M) expenses because of latent defects.

The 'CE' suffix indicates credit enhancement by way of the financing agreement which includes a co-obligor structure and cross default clauses among the nine SPVs, allowing for availability of project cash flow post debt servicing of individual SPVs for meeting debt obligations of the other SPVs.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of the nine MAIF 2 Road SPVs in line with its criteria for rating entities in homogeneous groups and equated the rating of the individual SPVs to that of the group. All the nine SPVs are in the same business of operating and maintaining toll roads, are under the same management and are critical to the group. Each SPV acts as a co-obligor to the others. Post debt servicing in each SPV, the excess cash flow is available for debt servicing of the other SPVs. However, the ‘CE’ suffix is assigned to those entities whose credit has been enhanced as a result of the co-obligor structure.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strong financial risk profile with robust debt service coverage ratio (DSCR) supported by favourable location of stretches and a healthy capital structure

The group benefits from strong traffic potential given the favourable location of the project stretches. Around 75% of the revenue of the MAIF 2 Road SPVs is derived from six stretches in AP, which are part of National Highway (NH) 5 of the GQ connecting Kolkata and Chennai and have high upside potential for traffic, given the presence of ports, industrial clusters, and consumption centres in their periphery. These stretches get traffic from the industrial centres in Visakhapatnam, East-West Godavari, Srikakulam and Ganjam districts, and provide connectivity to the major port in Visakhapatnam and other ports in Kakinada, Krishnapatnam and Gangavaram. The project stretches in Gujarat provide connectivity to the Kandla, Mundra, and Porbandar ports, and to large industrial districts such as Morbi and Rajkot.

 

Given this, the project stretches have shown resilience to the pandemic.  The revenue grew by 9% in fiscal 2021 which was supported by faster traffic recovery in the stretches and significant increase in traffic volume on two stretches in AP (STPL and DTPL) due to diversion of traffic from the competing road which were under augmentation.

 

However, toll collection across the nine stretches was impacted in the month of May 2021 because of second wave of COVID-19. The impact of second wave was seen only for one month. Out of 9 stretches, five stretches recovered to pre-covid levels i.e. it reached June 2019 levels by June 2021 and for remaining four stretches it recovered to pre-covid levels of July 2019 levels by July 2021. Traffic in the two AP stretches, which had seen increased traffic last fiscal due to diversion from competing stretch, started normalising from January 2021 and are expected to normalise further in fiscal 2022 with completion of competing stretch. However, given the strong traffic potential of the nine stretches and annual toll rate revision which has a 3% fixed component and is linked to 40% of the annual change in the Wholesale Price Index, toll revenue growth is expected to be 8-10% over the medium term which would keep the average DSCR at comfortable levels.

 

The SPVs also benefits from healthy capitalisation as the project cost is funded through debt and equity ratio of 45:55. Total cost of around Rs 11,000 crore (including concession fee payable to NHAI and initial capital expenditure) is funded through debt of Rs 5,000 crore and sponsor's fund (equity and subordinate debt). The group will be raising Rs 200 crore across four SPVs which will be utilised to pay the sponsors in line with the initial facility agreement. The capital structure will remain comfortable with debt to equity ratio of around 0.9 time. Hence, the average consolidated DSCR continues to remain healthy throughout the tenure of debt.

 

• Structural benefits such as co-obligor structure, tight escrow mechanism with a well-defined payment waterfall

With the presence of a co-obligor structure, surplus cash flow after debt servicing in any SPV will be available to fund shortfall in other SPVs prior to due date. Furthermore, the waterfall mechanism ensures that toll collection will be escrowed and used to meet the principal and interest obligations post the payment of taxes, statutory dues and O&M expenses.

 

Also, DSRA (in the form of fixed deposit) equivalent to six months of servicing obligation will be maintained throughout the tenure of the loan. The group plans to raise debt of around Rs 600 crore (already tied up) to fund the first major maintenance.  The consolidated DSCR will be checked for the immediate previous quarter and payment to shareholders will be made if the consolidated DSCR is not less than 1.10 times in the immediate previous financial quarter and subject to meeting other restricted payment conditions stipulated in the facility agreement. There is about Rs 409 crore cash surplus as of July 2021 of which Rs 280 crore can be distributed to the shareholders. However, it remains in the company for exigencies.

 

• Strong and experienced sponsor

MAIF 2 is an infrastructure fund managed by Macquarie Infrastructure and Real Assets (MIRA), which is the world's largest infrastructure asset manager and the first fund manager to invest in controlling stakes of road assets in India. MIRA-managed funds have successfully operated 12 BOT (build-operate-transfer)-toll, 1 annuity and 8 hybrid annuity projects in the country directly or through investee companies over the past 15 years.

 

The SPVs outsource O&M activities to specialised and experienced contractors. Ashoka Buildcon Ltd (rated ‘CRISIL AA-/Stable/CRISIL A1+’) is currently carrying out the tolling operation and the initial improvement works for the projects. The company is working towards reduction in tolling expenses through automation at all the toll plazas thereby reducing the dependence on manpower. Ability of the management to maintain quality of the stretch in the budgeted cost will remain a rating sensitivity factor.

 

Weakness:

• Susceptibility of toll revenue to volatility in traffic or increased maintenance cost as a result of any latent defect

Toll collection, the single source of revenue, is susceptible to volatility because of toll leakages, competing routes, fluctuations in WPI-linked inflation, seasonal variations in vehicular traffic and economic downturns. Also, given that the nine stretches have been operational for many years, any latent defect could result in higher-than-anticipated maintenance cost, thereby impacting the debt protection metrics.

 

Any change in government policy (such as the demonetisation of high-value currency notes in November 2016) or unforeseen circumstances such as Covid-19 can adversely impact cash flow and debt protection metrics.

 

Furthermore, the term loan has a floating interest rate, it is subject to volatility as per the changes in economic scenario and may impact DSCR levels in case of unfavourable movement on interest rate.

Liquidity: Strong

The MAIF 2 Road SPVs have strong liquidity, with DSCR expected to be healthy throughout the tenure of the loan. Toll collection stood at Rs 815 crore against debt obligation of Rs 457 crore in fiscal 2021. While toll revenue may be affected in the near term because of possible future waves of the pandemic, it will be adequate to cover debt obligation of about Rs 440 crore in fiscal 2022. DSRA equivalent to six months of debt obligation will be maintained throughout the tenure of the debt. DSRA of Rs 248 crore was maintained in a fixed deposit as of July 2021. There is cash surplus of Rs 280 cr (part of unencumbered cash of Rs 409 crore) which can be distributed to the shareholders. However, it is still in the system to meet any contingencies and tackle current pandemic situation.

Outlook: Stable

CRISIL Ratings believes the MAIF 2 Road SPVs will continue to generate healthy toll revenue over the medium term, backed by good traffic potential on the project stretches. The consolidated DSCR is expected to remain healthy over the tenure of the loan.

Rating Sensitivity factors

Upward factors:

• Sustained consolidated toll revenue growth of ~8% on annual basis
• Lower-than-expected operating cost resulting in a better consolidated DSCR

 

Downward factors:

• Contraction or stagnancy in consolidated revenues on sustained basis
• Higher-than-expected O&M cost or additional debt weakening the consolidated DSCR
• Non adherence to the co-obliger structure

About the Company

Incorporated in March 2018, Diwancheruvu Tollway Pvt Ltd is a special purpose vehicle promoted by MAIF 2. It operates a 71-kilometre stretch on NH-5 in Andhra Pradesh connecting Annavaram to Diwancheruvu and is part of GQ. The stretch is one of the part of the nine-project TOT bundle awarded by NHAI in March 2018.

 

About Macquarie Asia Infrastructure Fund 2

MAIF 2 is a 10-year closed end fund targeting infrastructure investments in Greater China, India, Korea, Japan, Australia, New Zealand, and South East Asia.

Key Financial Indicators

Financials as on / for the period ended March 31		2021 Aud.	2020 Aud.
Revenue*	Rs crore	123	131
Profit after tax	Rs crore	(105)	(79)
PAT margin	%	(84.9)	(60.4)
Adjusted debt/adjusted networth^	Times	19.38	8.16
Interest coverage^^	Times	1.02	1.01

^Shareholder optionally convertible debentures (OCDs) have been treated as debt.

^^Interest coverage does not include interest on shareholder OCDs.

*Revenue includes toll collection of Rs 105.69 crores (PY: Rs102.39cr) and balance is construction and utility shifting income recognised as per IND AS accounting standards, wherein an equal amount is recognised as construction and utility shifting revenue and construction and utility shifting expense.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs Crore)	Complexity Level	Rating assigned with outlook
NA	Term Loan	NA	NA	Aug-38	960.0	NA	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Siddhantham Tollway Pvt Ltd	Full	Co-obligor structure and cross-default clause amongst all SPVs
Garamore Tollway Pvt Ltd	Full
Icchapuram Tollway Pvt Ltd	Full
Diwantham Tollway Pvt Ltd	Full
Ankapalli Tollway Pvt Ltd	Full
Diwancheruvu Tollway Pvt Ltd	Full
Bamanbore Tollway Pvt Ltd	Full
Porbandar Jetpur Tollway Pvt Ltd	Full
Puintola Tollway Pvt Ltd	Full