IndInfravit Trust Rating Reaffirmed
Rating Action
1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities ^A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and will be supported by certain critical documentation by the issuer, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015, directive by the Securities and Exchange Board of India (SEBI), 'Standardising the term, rating symbol, and manner of disclosure with regard to conditional/ provisional/ in-principle ratings assigned by credit rating agencies (CRAs)'
CRISIL Ratings has reaffirmed its 'Provisional CRISIL AAA/Stable' rating on the non-convertible debentures (NCDs) of IndInfravit Trust (Trust).
Credit risk profile of the underlying special purpose vehicles (SPVs) has improved significantly due to debt reduction after their acquisition by the Trust. However, for additional comfort to the NCD holders, there were changes in the waterfall mechanism or the priority of usage of cashflows from the SPVs and Trust (in final executed documents as compared to the terms at the time of the provisional rating exercise) resulting in reduction of support which can be extended by the Trust to the SPVs. This can impact credit quality of the Trust due to the presence of a cross default clause, which states that a default by an underlying SPV on its external debt obligation will lead to an event of default on the Trust. The rating was placed on watch with developing implications on August 10, 2020.
To uplift the credit profile of underlying SPVs, Trust in November 2020 had set aside funds required for pre-payment of debt and upfront major maintenance (MM) reserve creation in some of the underlying SPVs in the Trust’s distribution account. Further, the Trust had given an undertaking that the debt will be prepaid and upfront reserves would be created by March 2021 and with this, the rating watch was resolved on November 18, 2020. The pre-payment of debt is now expected to complete by April 2021. The delay from March 2021 is due to operational constraints.
Total debt reduction of Rs 280 crore is expected across four SPVs (Rs 50 crore in Bijapur Hungund Tollway Pvt Ltd [rated ‘CRISIL AA/Positive’], Rs 50 crore in Dhule Palesner Tollway Ltd, Rs 160 crore in Devihalli Hassan Tollway Ltd and Rs 20 crore in Shreenathji Udaipur Tollway Pvt Ltd [SUTPL; rated ‘CRISIL AA/Positive’]). Rs 80 crore of upfront MM reserves have been created for two SPVs: Rs 65 crore for SUTPL and Rs 15 crore for Nagpur Seoni Expressway Ltd.
The 'provisional' rating will be converted to a 'final' rating upon completion of debt prepayment in the SPVs as per the undertaking.
Of the nine projects which were to be acquired from Sadbhav Infrastructure Project Ltd (SIPL), eight have been transferred to the Trust and acquisition of the ninth project, Ahmedabad Ring Road (ARR) has been delayed. The entire equity required for this acquisition (for nine assets) has been raised from investors while debt of Rs 1,675 crore out of the total proposed debt of Rs 2,150 crore has been raised till date (balance to be raised on acquisition of the ARR project). After their acquisition, debt level of the Sadbhav pool (for eight assets) has come down by more than 55% as part of the debt in these assets has been prepaid. This has resulted in significant improvement in the standalone credit profile of these underlying SPVs.
Collection on the stretches was suspended from March 26, 2020, until April 19, 2020, on account of the nationwide lockdown following the Covid-19 pandemic. The portfolio, however, has seen good recovery in traffic since easing of the lockdown. Monthly toll collection of the portfolio surpassed last year’s collections since September 2020 (compared with collections of the same month in the previous year) and in February 2021 was 109% of February 2020 collections. While collection for fiscal 2021 is expected to be lower than that for fiscal 2020, the debt service coverage ratio (DSCR) for fiscal 2021 is expected to remain comfortable. Moreover, the Trust along with its underlying SPVs had cash of over Rs 700 crore as of December 2020 (which includes Rs 260 crore earmarked as per the undertaking and otherwise unencumbered). This cash is over and above the debt service reserve account (DSRA) of three month debt servicing obligation being maintained for all external debt (including that in the SPVs) and major maintenance reserve maintained in all the SPVs, in the form of cash.
The rating continues to reflect robust debt protection metrics backed by good traffic potential of the stretches, and moderate leverage of 41% as of July 2020. The leverage is calculated with consolidated external debt at the Trust and all underlying SPVs, while also includes outstanding deferred premium payable to the National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’). As per the terms, the Trust has an external debt cap of 49% of its valuation. Additionally, maintenance of a three-month DSRA for the consolidated debt provides liquidity cushion. The rating factors in the diversified portfolio of 14 assets with strong operational track record. 12 of the 14 assets have been operational for more than five years and most of the concessions (11 out of 14) are from the NHAI. The rating also derives strength from the experienced project managers, L&T Infrastructure Development Projects Ltd (L&T IDPL) and SIPL.
These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume, and to development or improvement of alternative routes or modes of transportation that could impact the DSCR, and volatility in interest rates and operational costs. Also, some of the projects are expecting an extension in the concession period on account of traffic being lower than target levels (on a predetermined target traffic date), as provided in the concession agreement. Non-receipt of the extension will remain a rating sensitivity factor. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of IndInfravit Trust with its underlying SPVs. That’s because the SPVs have to mandatorily dispense 90% of the net distributable cash post servicing operations and maintenance (O&M) and external debt obligation to the Trust to service the debt at the Trust level (which includes the rated NCDs). However, support that can be extended by the Trust to the SPVs has now been limited as per the executed documents due to the quarterly cash trap check on the Trust level being done prior to servicing of shortfall in the underlying SPVs. This can impact the Trust’s credit quality due to the presence of a cross default clause, which states that a default by an underlying SPV on its external debt obligation will lead to an event of default on the Trust. Hence, while all the SPVs are combined to arrive at the rating on the NCDs at the Trust level, the SPVs are also evaluated on a standalone basis to determine their ability to service their external debt.
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: *Robust debt protection metrics supported by favourable location of stretches and moderate leverage The portfolio comprises of 14 assets– 5 assets of L&T IDPL and 9 of SIPL which are being undertaken on a public-private partnership basis:
The toll projects are situated along major industrial and tourist hubs and connect major cities such as Hyderabad, Chennai, Delhi, and Mumbai and ports such as Kandla, Mundra, and Chennai. Overall, revenue is well diversified. Furthermore, the stretches are spread across five key states that drive India’s gross domestic product (GDP). The Trust thus benefits from strong traffic potential. A few of the projects act as feeder routes to others in the portfolio, providing traffic synergies. Also, 8 of the 12 toll projects have an annual toll rate escalation with a fixed increase of 3% and a variable portion equal to only 40% change in wholesale price index (WPI), limiting dependence on WPI, thereby supporting revenue. Toll revenue grew 9-13% over fiscals 2018 and 2019 and 7% during the first 11 months of fiscal 2020 (pre-Covid-19) and is expected to remain moderate over the medium term.
The consolidated DSCR is likely to be healthy throughout the tenure of the debt, supported by substantial toll collection and moderate leverage. The ratio of consolidated debt to total enterprise value is currently 41% and capped at 49% as per the executed documents.
*Healthy financial flexibility given the cash pool mechanism, creation of DSRA, and tight escrow mechanism with a well-defined payment waterfall The waterfall mechanism ensures that toll collection will be escrowed and will be used to meet the costs as per the order below:
Moreover, the cash trap check ensures that if the consolidated DSCR is lower than 1.5 times, then cash will not be distributed to unitholders until DSCR is restored back to 1.5 times. This is checked quarterly for the trailing 12 months. Furthermore, any transfer to the distribution account (if no cash trap event has occurred) will be made only after meeting debt and maintenance obligations across all SPVs. Given that the SPVs are not creating any major maintenance reserve, this ensures that major maintenance in any of the SPVs is not impacted by lack of funding. Financial flexibility is also supported by the maintenance of DSRA for three months of interest and principal obligation of the consolidated debt.
* Experienced developers and strong and reputed investors Canada Pension Plan Investment Board (CPPIB) and The Ontario Municipal Employees Retirement System (OMERS) together have 47.9% shareholding in IndInfravit Trust. Allianz Capital Partners (ACP), which is Allianz Group’s asset manager, has 22.7% stake. These investors have an extensive track record of investing in the infrastructure sector globally and are actively involved in managing the Trust’s operations. L&T IDPL is the project manager for its five assets, while SIPL will be the project manager for its nine assets (currently managing eight of its assets transferred to the Trust). Both these developers have considerable experience in developing and maintaining road infrastructure projects.
Weakness: *Susceptibility of toll revenue to volatility in traffic, or development or improvement of alternative routes Toll collection, which contributes to about 90% of the portfolio’s revenue, is exposed to volatility because of toll leakages, competing routes, lack of timely increase in toll rates, fluctuation in WPI-linked inflation, seasonal variations in vehicular traffic, and economic downturns.
Furthermore, any change in government policy such as the demonetisation in November 2016 and more recently the lockdown due to the Covid-19 pandemic, can impact cash flow and debt protection metrics.
Further, the rating takes into account that the portfolio consists of three road assets with concessions from state authorities (two toll and one annuity), which expose the Trust to risks pertaining to decisions of these authorities with respect to applicability of toll rates in the case of toll assets and their credit risk profiles in case of annuity projects.
Furthermore, the portfolio has a major revenue contributing project, Beawar Pali Pindwara, which also has large back-ended premium payments. Additionally, four projects are expected to receive extension in their concession period. The concession agreement of these projects has provision for such extension in case traffic is lower than the target traffic on a specified target traffic date. Target traffic dates of these projects fall between fiscals 2020 and 2023. Given the existing low traffic volumes and expectation of moderate growth, an extension in the concession period is expected and will remain a rating sensitivity factor.
*Susceptibility to volatility in operational costs and interest rates The Trust is exposed to risks related to maintenance of the projects in the underlying SPVs as per the specifications and within the budgeted costs. Further, the SPVs are not creating any major maintenance reserves, in the absence of which the cash outflows during the major maintenance years could be significant. Although pooling of cash flows provides some cushion in terms of meeting such requirements, any significant dip in toll collection could result in cash flow shortfall for such maintenance. Operational risk is mitigated to some extent due to the fixed price contract entered into with SIPL for the major and routine maintenance of its nine assets. Further, one of the project SPVs, Krishangiri Walajahpet Tollway Pvt Ltd, has pending works of Rs 267 crore, (could not be completed earlier due to non-availability of land), which exposes it to construction-related risk. However, the Trust has tied-up the debt funding for this.
The interest rate for the NCDs is fixed for the first three years, post which it will be reset on a mutually agreed basis by the issuer and the debenture holders, while interest rates on the existing bank loan facilities are floating with annual reset. This exposes the Trust to volatility in interest rates. Although the cushion in the cash flow will partially help to absorb the impact of such fluctuations, it will remain a rating sensitivity factor. Furthermore, the NCDs stipulate that the debenture holders can recall the debentures if the DSCR drops below 1.35 times or if the debt/EBITDA (earnings before interest, tax, depreciation and amortisation) ratio exceeds 6 times for any 12-month period, thereby exposing the Trust to refinancing risk. In such a scenario, the issuer would have to redeem/refinance the debentures within 90 calendar days of demand, which can be further extended upon payment of additional coupon of 1% per annum. However, CRISIL Ratings takes comfort from the healthy refinancing flexibility of the Trust. |
Liquidity : Superior Consolidated cash and cash equivalents were high at over Rs 700 crore as on December 31, 2020 (which includes Rs 260 crore earmarked as per the undertaking and otherwise unencumbered). Despite the impact of the pandemic, toll collections will be adequate to meet operational expenses and debt obligation in fiscal 2021. Furthermore, a DSRA equivalent to three months' interest and principal obligation of the consolidated debt is being maintained in the form of cash. Liquidity is also supported by the provision for trapping of cash if the DSCR falls below 1.5 times for the trailing 12 months, checked quarterly. This cash will not be distributed to unitholders until the DSCR is restored back to 1.5 times. |
Outlook Stable CRISIL Ratings believes IndInfravit Trust will continue to generate healthy toll revenue over the medium term, backed by good traffic potential on the project stretches |
Rating Sensitivity factors Downward factors
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About the Trust IndInfravit Trust is an Infrastructure Investment Trust (InvIT) formed on March 7, 2018, under the InvIT regulations of Securities and Exchange Board of India. L&T IDPL, LTIDPL INDVIT Services Ltd and IDBI Trusteeship Services Ltd are the sponsor, investment manager and trustee, respectively.
The Trust has been listed on the National Stock Exchange and the Bombay Stock Exchange since May 9, 2018. The fund raising was done through private placement. Key investors include the CPPIB (27.9%), ACP (22.7%) and OMERS Infrastructure Asia Holdings Pte Ltd (20.0%). L&T IDPL holds 15% of the units that are locked in for three years (till May 9, 2021) as per the current regulations and SIPL holds 10.0%.
Of the nine projects that were to be acquired from SIPL, eight barring ARR have been transferred to the Trust. The current portfolio comprises of 11 operational BOT (build, operate, transfer) toll road projects acquired from L&T IDPL and SIPL and 2 operational BOT annuity road projects acquired from SIPL. As per the definitive agreement between IndInfravit Trust and SIPL, which was signed on July 1, 2019, the Trust was bound to acquire the ARR project till June 30, 2020- the same has been delayed due to delay in receipt of approval from ARR’s concessioning authority.
Following is the list of projects:
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Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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