Detailed Rationale

CRISIL Ratings has assigned its 'Provisional CRISIL AA+/Stable' rating to the proposed long-term bank loan facility for Rs.42.39 crore of Siddhantham Tollway Private Limited (STPL) and reaffirmed its ‘CRISIL AA/Stable’ rating on the existing long-term bank facilities for Rs.239.5 crore of STPL. The special purpose vehicle (SPV) is part of the toll-operate-transfer (TOT) package, comprising of 9 entities, awarded by National Highways Authority of India (NHAI, rated 'CRISIL AAA/Stable') in March 2018 to Macquarie Asia Infrastructure Fund 2 (MAIF 2).

 

For arriving at the rating for the proposed facility, CRISIL Ratings has combined the business and financial risk profiles STPL with seven other entities in the group (excluding one entity in line with financing agreement), as these SPVs are expected to act as co-obligors and surplus funds from each SPV will be available towards debt servicing of the other SPVs, if required. For the existing debt, the business and financial risk profiles of STPL and eight other entities have been combined in line with the financing agreement.

 

The rating for the proposed debt factors in improvement in the average debt service coverage ratio (DSCR) on account of expected longer debt repayment tenure of 20 years (against remaining tenure of 15 years for the existing debt). Healthy toll collections and limited top-up will support the improvement in DSCR. The proceeds of the proposed debt are expected to be utilised towards refinancing of the existing debt and part fund the ongoing major maintenance exercise; top up of Rs 350 crore is expected to be taken.

 

For assigning the provisional rating, CRISIL Ratings has reviewed the draft sanction letter and draft inter corporate guarantee agreement (which complies with RBI 12-pointer checklist) for the proposed facility. The provisional rating will be converted into a final rating on completion of refinancing of the existing debt in line with draft documents.

 

For the existing facility, each SPV of the TOT acts as a co-obligor to the other SPVs in addition to the cross default (i.e., default on any conditions in one SPV leads to default in all other SPVs). Testing of debt service reserve account (DSRA) of all SPVs is done 10 business days prior to the due date i.e., testing date. Post debt servicing in each SPV, the excess cash flow is available for debt servicing of the other SPVs. For the proposed facility also, each SPV of the TOT will act as a co-obligor to the other SPVs in addition to the cross default (i.e., default on any conditions in one SPV leads to default in all other SPVs). Testing of debt service reserve account (DSRA) of all SPVs will be done 2 business days prior to the due date i.e., testing date. Post debt servicing in each SPV, the excess cash flow will be available for debt servicing of the other SPVs.

 

The rating continues to reflect the moderate traffic potential of the project stretches and healthy capital structure. The ratings also factor in the strong sponsor, surplus cash and bank balance, adequate liquidity support through 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.

 

Consolidated Toll income for fiscal 2023 stood at ~Rs. 915 crore witnessing healthy improvement of ~12% as compared to fiscal 2022 on account of higher toll rates (consequent to high Wholesale Price Index [WPI] inflation) and moderate traffic potential of the nine stretches.

 

Toll collection for the first five months of fiscal 2024 (5MFY24) has witnessed growth of ~8% as compared to same period previous fiscal for 9 stretches.

 

The group preponed its first MM cycle given the deterioration in quality of stretches against initial plan of fiscal 2025. Around 18% of MM expenses of has been incurred till May 2023. CRISIL Ratings would continue to monitor the quality of project stretches and progress on MM.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of 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. For the proposed debt facilities, the group consists of eight stretches while for the existing debt facilities, all nine stretches have been considered. All the 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. The approach also factors in presence of cross default amongst SPVs, wherein a default in any one SPV would mean a default in all other SPVs.

 

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 healthy debt service coverage ratio (DSCR)

Around 68% of the revenue of the MAIF 2 road SPVs is from six stretches in AP, which are part of National Highway (NH) 5 of the Golden Quadrilateral 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 major port in Visakhapatnam and other ports in Kakinada, Krishnapatnam and Gangavaram. The remaining project stretches are in Gujarat and they provide connectivity to the Kandla, Mundra, and Porbandar ports, and to large industrial districts such as Morbi and Rajkot.

 

Toll income for fiscal 2023 for all nine stretches together stood at ~Rs. 915 crore witnessing healthy improvement by ~12% as compared to fiscal 2022 on account of higher toll rates (consequent to high Wholesale Price Index [WPI] inflation) and moderate traffic potential of the nine stretches. Toll collection for the first five months of fiscal 2024 (5MFY24) has witnessed growth of ~8% as compared to same period previous fiscal for 9 stretches. The annual toll rate revision has a 3% fixed component and is linked to 40% of the annual change in the WPI.

 

Group is proposing to refinance existing facilities with the proposed facilities. The proposed debt is expected to have a longer tenure of 20 years (against remaining tenure of 15 years for the existing debt) and the proceeds are expected to be utilised towards refinancing of the existing debt and part fund the ongoing major maintenance exercise; top up of Rs 350 crore is expected to be taken. The same will lead to improvement in debt protection metrics despite some increase in debt.

 

At the time of the initial funding, the MAIF 2 road SPVs benefit from healthy capitalisation as the project cost was funded through debt and equity in a ratio of 45:55. Total cost of around Rs 11,000 crore (including concession fee payable to NHAI and initial capital expenditure) was funded through debt of Rs 5,000 crore and sponsor's fund (equity and subordinate debt). Despite increase in total debt, the capital structure is expected to remain comfortable.

 

Healthy capitalization, long tenure of the debt and adequate toll collection have resulted in sound consolidated DSCR throughout the tenure of the debt. The DSCR profile is also expected to improve with the proposed debt as compared to the existing debt wherein the initial year DSCRs are moderate.  

.

Co-obligor structure; tight escrow mechanism with a well-defined payment waterfall

Surplus cash flow after debt servicing in any SPV will be available to fund shortfall in other SPVs, given the co-obligor structure. 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 under both existing and proposed facility. Also, DSRA equivalent to six months (for the existing facility) and four months (for the proposed new facility) of servicing obligation will be maintained throughout the tenure of the loan.

 

For existing facility, the consolidated DSCR will be checked for the immediate previous quarter and payment[1] to sponsors will be made if the consolidated DSCR is not less than 1.10 times in the immediate previous financial quarter and for the proposed facility, the consolidated DSCR will be checked for the immediate previous 12 months and payment to sponsors will be made if the consolidated DSCR is not less than 1.10 times and subject to meeting other restricted payment conditions stipulated in the facility agreement.

 

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. Ability of the management to maintain the project stretches in the budgeted cost will remain a rating sensitivity factor.

 

Weaknesses:

Higher maintenance cost leading to higher debt

The nine stretches have been operational for several years. The MM cost and phasing have been updated based on the technical test reports. The group preponed its first MM cycle given the deterioration in quality of stretches against initial plan of incurring the MM in fiscal 2025. The first MM cost has also increased to Rs 953 crore from previous estimate of Rs 600 crore. The increase in the first MM cost is due to increase in bitumen rates, GST rate hike from 12% to 18% and first MM to be undertaken in three stretches (which was not envisaged earlier) due to delay in capacity augmentation in these stretches. As of May 2023, ~18% of MM expenses have been incurred. CRISIL Ratings would continue to monitor the quality of project stretches and progress on MM.

 

Susceptibility of toll revenue to volatility in traffic or interest rates

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, 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.

 

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.

[1]Includes payment of any dividend or interest/coupon of any subordinate loans etc. specified in facility agreement.

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 915 crore against debt obligation of ~Rs 460 crore in fiscal 2023. The existing debt facilities have requirement of 6 months of DSRA and the company has maintained DSRA of Rs. 269 crore and liquidity of Rs 254 crore over and above DSRA as on August-2023. Post refinancing of existing debt, DSRA equivalent to four months of debt obligation will be maintained throughout the tenure of the debt. The company has a track record of maintaining healthy liquidity over and above DSRA and going forward as well it intends to maintain healthy liquidity as surplus. 

Outlook: Stable

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

Rating Sensitivity factors– for existing debt

Upward factors:

• Consolidated toll revenue growth of ~12% on a sustained annual basis along with cost efficient maintenance resulting in materially improved DSCR
• Significant improvement in quality of stretches providing visibility of optimal operating costs through the life of assets

 

Downward factors:

• Deterioration in quality of project stretches leading to higher-than-expected outflows towards maintenance or material adverse observations from authority
• Higher-than-expected O&M cost or additional debt weakening the consolidated DSCR
• Lower-than-expected toll revenue by more than 10% on sustained basis
• Non adherence to structure

 

Rating Sensitivity factors – for proposed debt

Upward factors:

• Significant improvement in quality of stretches providing visibility of optimal operating costs through the life of assets
• Consolidated toll revenue growth of 8-10% on a sustained annual basis along with cost efficient maintenance resulting in healthy DSCR

 

Downward factors:

• Deterioration in quality of project stretches leading to higher-than-expected outflows towards maintenance or material adverse observations from authority
• Higher-than-expected O&M cost or additional debt weakening the consolidated DSCR
• Lower-than-expected toll revenue by more than 10% on sustained basis
• Non adherence to structure

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following:

 

• Completion of refinancing terms in line with draft documents

 

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 execution.

 

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.

Rating that would have been assigned in the absence of the pending documentation: CRISIL AA/Stable

In the absence of pending steps/documentation considered while assigning the provisional rating as mentioned above, CRISIL Ratings would have consolidated business and financial risk profiles of all nine SPVs in line with the analytical approach for the existing debt.

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

Incorporated in March 2018, STPL is a special purpose vehicle promoted by MAIF 2. It operates an 88.5-kilometre stretch on NH-5 in AP, and is part of the nine-project TOT bundle awarded by NHAI in March 2018.

 

The term loan provided to the MAIF 2 Road SPVs by Yes Bank was taken over by the State Bank of India (SBI) on June 30, 2020. Escrow and DSRA accounts maintained with Yes Bank were shifted to SBI (5 SPVs) and ICICI Bank (4 SPVs). Further, ICICI Bank’s exposure was taken over by HDFC Bank in October 2021. While escrow and DSRA accounts are being shifted from ICICI Bank (4 SPVs) to HDFC Bank, the MMR facility of Rs 600 crore continues from Yes Bank.

About MAIF 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	Unit	2023	2022
Revenue*	Rs.Crore	55	72
Profit After Tax (PAT)	Rs.Crore	(26)	(24)
PAT Margin	%	(43.0)	(31.3)
Adjusted debt/adjusted networth^	Times	4.15	2.79
Interest coverage^^	Times	(0.25)	(0.51)

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

^^Interest coverage does not include interest on shareholder OCDs

*Revenue comprises toll collection of Rs 47.6 crore (PY: Rs 57.5 crore) and balance is construction income/utility shifting income recognised as per IND AS accounting standards, wherein an equal amount is recognised as construction revenue and construction expense

Any other information: Not applicable