Rating Rationale
March 18, 2019 | Mumbai
India Infrastructure Trust
'CRISIL AAA/Stable' Converted from Provisional Rating to Final Rating for NCD 
 
Rating Action
Rs.6370 Crore Non Convertible Debentures CRISIL AAA/Stable (Converted from Provisional rating to Final rating)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has converted the provisional rating assigned to the non-convertible debentures (NCDs) of India Infrastructure Trust (India Infra; an infrastructure investment trust [InvIT]) to a final rating of 'CRISIL AAA/Stable'. CRISIL has received the final legal documents executed for the transaction and has hence, converted the provisional rating to a final rating.
 
As required, CRISIL has received the following final executed documents:

  • India Infra debenture trust deed
  • India Infra term sheet
  • SPV debenture trust deed (as annexed to India Infra debenture trust deed)
  • SPV term sheet (as annexed to India Infra term sheet)
  • Shareholders' and option's agreement
  • Pipeline usage agreement (agreed form to be executed once India Infra acquires SPV)
  • O&M agreement, and its related sub-agreements
  • Joint venture (JV) agreement
  • India Infra escrow account agreement
  • Share purchase agreement

India Infra will acquire the entire stake in Pipeline Infrastructure Pvt Ltd (PIPL), a special purpose vehicle (SPV), which will take over East West Pipeline (EWP) from Reliance Industries Holdings Pvt Ltd on a going concern basis. India Infra will use the proceeds from units and NCDs (InvIT-NCDs) to subscribe to the NCDs (SPV-NCDs) to be issued by PIPL.
 
The rating reflects EWP's strategic location, expectation of stable cash-flows backed by long term contract with Reliance Industries Ltd (RIL; rated 'CRISIL AAA/Stable/CRISIL A1+') and comfortable financial risk profile. These strengths are partially offset by exposure to refinancing and operation and maintenance (O&M) risks.
 
EWP, a 1375-km cross-country pipeline, is the sole pipeline connecting the gas-producing eastern coast to the western coast of India. The pipeline also connects key industrial clusters and is connected to GAIL's trunk and other pipelines.
 
PIPL will enter into a pipeline usage agreement (PUA) with RIL whereby RIL will contract a certain capacity of the pipeline for 20 years. The arrangement will ensure steady cash-flows to PIPL in case the actual revenue is lower, either on account of lower gas volume or tariff. RIL will be entitled to use unutilised capacity payments made under the PUA, in future. RIL will also participate in upside sharing if the actual volumes are higher than the contracted capacity.
 
Currently, pipeline revenue is moderate mainly on account of lower gas volumes and delay in finalisation of the regulatory tariff for gas transportation. However, revenue is expected to improve with expected increase in gas volumes and upward revision in the tariff. Gas volumes are expected to ramp up as RIL and other operators are making significant investments for gas extraction in the Krishna Godavari (KG) basin. EWP is critical for RIL given the significant investments being undertaken for ramping up the gas volumes from KG-D6 fields. Furthermore, the pipeline is being used by other operators like ONGC and for transporting RLNG. For fiscal 2018, the gas flows from other sources contributed to over 70% of total gas flows. Also, EWP's regulated tariff has been increased to Rs 71.66 per million British Thermal Unit (mmbtu) from Rs 52.23 per mmbtu earlier, and will augment its revenues.
 
Financial risk profile remains robust, with debt-to-value within 49%, and a comfortable debt service coverage ratio (DSCR). The rating also takes into consideration presence of a waterfall mechanism and debt service reserve account (DSRA) equivalent to three months of debt obligations.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of India Infra with its underlying SPV: PIPL. This is because the InvIT has direct control over PIPL, and will retain the entire equity shares of the SPV until full redemption of the NCDs. Furthermore, the SPV has to mandatorily distribute 90% of its net distributable cash (post servicing of debt) to the InvIT, leading to highly fungible cash flow. Also, the borrowing of the InvIT will remain within 49% of the value of the InvIT assets.
 
Refer to Annexure - Details of consolidation for the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Strategic location of the EWP pipeline
EWP is the sole pipeline connecting the gas producing eastern coast to the western coast of India, extending from Kakinada in Andhra Pradesh to Bharuch in Gujarat. The pipeline supplies gas to key industrial clusters, and customers in the fertilizer, power, iron and steel, petrochemicals and refining sectors. The pipeline is also connected to pipelines of other operators like GAIL and GSPL for onward delivery of gas to other parts of India.
 
* Stable cash flows from EWP
Cash flows benefit from the presence of a 20-year contract with RIL for contracted capacity payments and the strong credit profile of the counterparty. EWP is critical for RIL given the significant investments being undertaken for ramping up the gas volumes in KG-D6 fields. The arrangement will smoothen out the cash-flows in case the actual gas volume is lower or tariff revision is delayed or lower than expected.
 
Currently, cash flows are moderate mainly on account of lower gas volumes and delay in finalisation of the tariff. However, the cash-flows are expected to improve with expected increase in gas volumes and regulatory tariff for gas transportation. Gas volumes are expected to ramp up over the medium term as RIL and other operators are making significant investments for gas extraction in the KG-D6 basin. The pipeline had 17.90 million metric standard cubic metre per day (mmscmd) of gas flows in fiscal 2018. Gas flows may drop over the near term, driven by a significant drop in RIL's gas production from its KG-D6 block. However, EWP also transported 12.93 mmscmd of gas from sources apart from RIL's KG-D6 basin, including from ONGC's gas fields and RLNG. Additional sources of gas, which formed a significant portion of the total gas flows in fiscal 2018, significantly cushions against the variability of gas production from RIL's KG-D6 basin.
 
EWP's regulated tariff has been increased to Rs 71.66 per mmbtu, as compared to Rs 52.23 per mmbtu earlier, and will augment its revenues.
 
* Comfortable financial risk profile
India Infra has a comfortable financial risk profile marked by stable cash accrual, healthy debt to value ratio, strong DSCR and presence of 3 month DSRA. Healthy cash generation of the underlying SPV will ensure a comfortable DSCR. The rating is also supported by financial covenants with debt within 49% of total assets and minimum interest coverage of 2.0 times for the NCDs. Presence of a waterfall mechanism lends further support.
 
India Infra also has a well-defined waterfall payment structure through an escrow account, adequate DSCR, and creation of liquidity in the form of DSRA. As per the waterfall mechanism, payment of interest on debentures and amounts due to debenture holders is paid before payment to the Investment Manager and distribution to unitholders. Further, PIPL will receive cash flows from RIL at the beginning of the quarter, which will be subsequently moved up to India Infra. Interest repayment at India Infra is scheduled at the end of each quarter, providing a cushion of three months. In addition, DSRA is maintained for a quarter. There are no principal repayments during the first 5 years.
 
The investors are also protected in case of delay in payments by RIL. In such a scenario, India Infra will exercise an enforcement option, which will require RIL to purchase the SPV-NCDs or infuse funds into PIPL. The proceeds will be used to redeem the InvIT-NCDs. The enforcement option will be consummated on the 158th day from the beginning of the quarter where payment has been missed from RIL.
 
Weaknesses:
* Moderate refinancing risks
Debt at India Infra has a bullet payment at the end of a five-year tenure, and exposes the trust to moderate refinancing risk. However, a 15-year tenure for underlying assets extending beyond the repayment tenor should help comfortably refinance the bullet repayment. Furthermore, India Infra's investment manager has to furnish a firm commitment letter for refinancing the outstanding NCDs a month before their maturity.
 
Further, debt at India Infra has a call option which resides with the issuer (valid till April 30, 2019). CRISIL believes India Infra will exercise the call option only after funding is tied up to refinance the debt. India Infra is expected to prudently refinance the maturing debt and continue to maintain its healthy DSCR.
 
* Moderate O&M risks
O&M for the pipeline will be undertaken by a contractor, which is a 50:50 Joint venture (JV) between the RIL group and InvIT sponsor. O&M expenses form a significant portion of the revenue. However, this risk is mitigated by the fact that any escalation in the expenses will be further funded by RIL, except for system usage gas, which will have to funded out of the SPV's revenue.
Liquidity

Stable cash flows are expected to amply cover debt obligations over the medium term, leading to a healthy DSCR of more than 2 times over the tenure of debt (five years). Furthermore, the long life of underlying assets, extending well beyond the debt tenor, should aid in refinancing bullet repayments at favourable terms. The three-month DSRA being maintained also supports liquidity.

Outlook: Stable

CRISIL believes India Infra will benefit from a long term pipeline usage agreement with a strong counterparty over the medium term. The rating also factors in the increase in regulatory tariffs for gas transportation and comfortable volume outlook.

Downside scenario
* Significant delay in receipt of quarterly payments from RIL
* Lower-than-expected DSCR
* Change in the credit profile of RIL.

About the Company

India Infra is promoted by an indirect subsidiary of Brookfield Asset Management (BAM): Rapid Holdings 2 Pvt Ltd (sponsor). The trust will acquire the entire stake in PIPL, an SPV, which will take over EWP from Reliance Industries Holdings Pvt Ltd on a going concern basis. PenBrook Capital Advisors Pvt Ltd (JV between BAM and Peninsula Land Ltd) will be the Investment manager. O&M contractor would be a 50:50 JV of the sponsor and Reliance Group. IDBI Trusteeship Services Ltd will be the debenture trustee.

Key Financial Indicators*
As on/for the period ended March 31 Unit 2018 2017
Revenue Rs Crore NA NA
Profit After Tax (PAT) Rs Crore NA NA
PAT Margins % NA NA
Adjusted Debt/Adjusted Networth Times NA NA
Interest Coverage Times NA NA
*Company is in project stage

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Cr)		 Rating assigned with outlook
NA Non-Convertible Debentures* NA NA NA 6370 CRISIL AAA/Stable
*Not yet placed
 
Annexure - List of Entities Consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for consolidation
PIPL Fully Consolidated Strong business and financial linkages
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  0.00
18-03-19  		CRISIL AAA/Stable  14-03-19  Provisional CRISIL AAA/Stable    --    --    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs rating criteria for REITs and InVITs
CRISILs Criteria for Consolidation

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