Road projects built on non-recourse debt structure (Ind-Ra)


The inherent structure of special purpose vehicles (SPVs) formed for road projects, builds-in the non-recourse nature of their debt in most cases says India Ratings and Research (Ind-Ra). The ratings of the parent and the subsidiary are hence, more often than not, different. It could even be possible, that one of the SPVs, carrying non-recourse debt, is rated at sub-investment grade or even default and at the same time the parent’s rating may be in the investment grade. In fact the higher investment grade in many cases may be possible only because the debt in the subsidiaries is non-recourse.

In assessing construction (sponsor) companies and the potential support they are expected to provide to project SPVs, Ind-Ra recognizes the non-recourse nature of most of the loan facilities. However, the ratings can still benefit considerably from the presence of a strong project sponsor.

Ind-Ra observes that sponsor support has even been provided at times when there was no contractually obligation to do so. Projects may be supported by the sponsor or parent in three main cases: to fund cost/time overruns during the construction stage, to infuse additional funds when operations and management expenses exceed the budget and to help with timely debt servicing in case of revenue underperformance. An important aspect for assessing such support from the parent is the emphasis placed on the sponsor’s historical track record of supporting its other projects and the likely ability of continuing to do so in the future. In certain cases, there may also be SPVs in which the debt is with-recourse to the parent.
Among the toll road projects in Ind-Ra’s portfolio, around 10 per cent were upgraded and 27 per cent were downgraded in the last one year. The key reasons for downgrades were revenue underperformance combined with the deterioration in the sponsor’s credit profiles. Investors, however, continue to look at investing into bonds backed by some of the road projects primarily due to the robust cash flows of these assets.

Ind-Ra maintains a negative outlook on the toll roads sector largely due to the absence of strong traffic recovery for operational road projects and the non-availability of encumbrance-free construction land which restrains the toll road sector’s prospects. Although Ind-Ra expects the economic growth to be higher year on year in FY16, toll roads would have to cover substantial ground, to recover the lost traffic of the past two years. Concurrently, the receding inflation will curtail revenue growth especially for projects in which the annual increase in toll rates is 100 per cent linked to the Wholesale Price Index.

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