The road sector has witnessed stressful times in terms of financings over the past four-five years. Lags and execution delays have resulted in potential investors being more cautious about committing funds to road projects. While lenders continue to be vigilant, they are now looking at refinancing of projects. The road sector has seen an increasing number of non-performing assets and hence an asset-liability mismatch has emerged. Financial closures have been almost non-existent. Nonetheless, some lenders are considering funding hybrid annuity projects. The market has seen an increasing acceptance of equity dilution and debt restructuring cases. Going forward, last mile funding is required to aid the implementation of stalled road projects.
Financial closures: Slipping numbers
While the sector has reported a surge in activity in terms of project awards, financing for build-operate-transfer (BOT) and hybrid annuity model (HAM) projects has been hard to avail of. During the period January 2014-October 2016, only 15 national highway projects were able to achieve financial closure. This is a steep decline in numbers. As per data released by the Ministry of Road Transport and Highways in July 2016, 14 road projects achieved financial closure in 2013 alone. While only seven financial closures were seen in 2014, the figure dropped further to five in 2015. During January-October 2016, only three projects, the Agra-Etawah bypass section widening project the Delhi-Meerut expressway, Package 1 and the Nagpur outer ring road were able to tie up funds.
The National Highways Authority of India (NHAI) awarded 19 HAM-based projects during 2015-16 and 2016-17 (April-July). However, as of October 2016, only two of these have achieved financial closure. Even though NHAI gives 40 per cent of the project cost as a grant, it has been difficult to avail of debt financing. One of the reasons for the lenders’ qualms is the fact that the developer’s risk exposure has shrunk further under this model. The concessionaire is now expected to bring in only 9 per cent of the project cost (15 per cent of the 60 per cent project cost not financed by NHAI) as equity.
Equity dilution: Expanding market for operational assets
The equity sale fervour in the road sector has increased in the past three to four years. In addition to a spike in the number of sale transactions, the market has witnessed the entry of global investors. Since January 2015, the road sector has concluded 10-11 key equity dilution deals valued at over Rs 20 billion. While most of these asset sales have been a result of the deleveraging of balance sheets and the infusion of the much-needed liquidity by debt-laden promoters, others have been an outcome of business strategies aimed at achieving growth at a faster pace as well as increasing market share.
Private equity (PE) investors are increasingly buying stakes in operational assets. However, these investors face challenges in managing the acquired assets, as most of these have been under stress in the past.
While equity sale transactions have been common across all stages of project implementation, operational asset sales have been dominant, especially in the past few years. Since 2012-13, equity dilution in operational/ ongoing road projects has been a common phenomenon. Some key companies that have offloaded their assets/equity portions in road projects are Gammon Infrastructure Projects Limited, IVRCL, Hindustan Construction Company [HCC] Limited, NCC Infra Limited, Madhucon Infra Limited, IL&FS Transportation Networks Limited, Jaiprakash Associates, and I Squared Capital. Other companies that are considering divesting their stakes include Soma Enterprises, Reliance Infrastructure Limited and Ramky Infrastructure Limited.
Burgeoning debt burden: Rising CDRs and SDRs
Execution delays, policy hold-ups and indebted cash-strapped promoter companies have rendered loan recovery difficult for banks. This has led to an increasing number of stressed assets in their books, and therefore restructuring of loans has become routine for most lending consortiums. In the past few years, financial stress in the road sector has increased manyfold. As per a report released by Crisil Research in October 2015, several BOT projects awarded during 2010-12 are high risk.
During the past 12-15 months, the sector also reported a surge in corporate debt restructuring (CDR) cases. In August 2015, Shapoorji Pallonji Jammu Udhampur Highway Limited raised funds through bonds to refinance project debt. In December 2015, Ashoka Buildcon Limited’s associate, Jaora-Nayagaon Toll Road Company Private Limited, completed the refinancing of its Rs 5.52 billion debt with the State Bank of India (SBI). Meanwhile, on December 1, 2015, IVRCL’s CDR lenders invoked strategic debt restructuring (SDR) of the company. In May 2016, Aurangabad Jalna Tollway Limited, a wholly owned subsidiary of Sadbhav Infrastructure Projects Limited (SIPL), completed refinancing its existing debt with new debt taken from other lenders under revised terms and conditions.
InvITs see light of day
The Securities and Exchange Board of India (SEBI), in May 2016, released norms for the public issue of infrastructure investment trust (InvIT) units in an effort to make it easier for cash-starved developers to raise capital from the public. The new norms pertain to the appointment of merchant bankers, disclosures in the offer documents, and filing of draft papers and keeping them in the public domain for at least 21 days. As per the norms, InvITs can offer up to 75 per cent of the units of the public issue to institutional investors and the rest to any other class of investors. In June 2016, SEBI granted the certificate of registration as an InvIT to MEP Infrastructure Developers Limited, which is the sponsor of the MEP InvIT.
IPOs mark a gradual comeback
Road sector players have also started raising funds through the capital market to meet their expenditure plans. In 2015, PNC Infratech Limited, MEP and SIPL successfully launched initial public offerings (IPOs). While IPO activity has been subdued in terms of numbers, these IPOs have generated interest from investors as most of them were oversubscribed, which in turn signals improved investor sentiment. Recently, in July 2016, Dilip Buildcon Limited’s IPO was oversubscribed by 20 times. In September 2016, IRB Infrastructure Private Limited, a wholly owned subsidiary of IRB Infrastructure Developers Limited and the investment manager of the IRB InvIT Fund, filed a draft offer document for an IPO.
Tapping the bond market
Indian companies have also been allowed to raise funds through masala bonds. This is a financial instrument through which Indian entities can raise funds from overseas markets in rupees. In June 2016, NHAI reportedly invited banks to submit expressions of interest for an offering of masala bonds at a minimum tenor of five years. NHAI is planning to issue rupee-denominated green masala bonds and list them on the Singapore or London Stock Exchange. Reportedly, NHAI expects to raise $500 million-$750 million in the first tranche. These bonds are expected to be floated soon. SBI Capital is the lead arranger and consultant for the issue.
Several policy initiatives have been taken to revive highway projects facing a resource crunch. In a bid to aid the sound execution of BOT-based projects and address stakeholder concerns, the government introduced amendments to the model concession agreement (MCA) for BOT projects in September 2015. As per the revised MCA, changes have been made regarding the termination of contract, project milestones, toll collection and rationalisation of timelines.
In November 2015, the Cabinet Committee on Economic Affairs approved a scheme entailing a one-time fund infusion to revive and physically complete languishing national highway projects, under the extension of provision available for converting BOT (toll) projects to BOT (annuity). In July 2016, NHAI and SBI entered into a pact to infuse funds in three projects located across Bihar, Maharashtra, Goa and West Bengal. Further, in September 2016, the authority decided to make a one-time Rs 3.5 billion infusion into the Gurgaon-Kotputli-Jaipur section (National Highway-8) six-laning project, which had been languishing for some time.
In June 2016, the Reserve Bank of India introduced a Scheme for Sustainable Structuring of Stressed Assets (S4A) as an optional framework for the resolution of large stressed accounts. The S4A envisages determining the sustainable debt level for a stressed borrower, followed by the bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments that are expected to provide an upside to lenders when the borrower turns around. In July 2016, the Joint Lender’s Forum of HCC Limited had approved the S4A to help the company bridge the cash flow gap resulting from a timing mismatch between claims realisation (including its interest) and debt servicing.
Meanwhile, steps such as extended debt tenor, classification of loans as secured, and easing of the refinancing process have proved to be beneficial. Besides, premium deferment for projects worth Rs 146 billion covering 1,351 km has been approved. Also, 10 BOT projects have availed of the securitisation option. The scheme entailing rationalised compensation for concessionaires is under evaluation.
Going forward, investors are looking at cluster deals to take over groups of road assets. Financiers are of the view that the BOT market will mark a comeback since the engineering, procurement and construction mode cannot function in isolation due to the limited availability of public funds. Both lenders and PE investors plan to tap the upcoming toll-operate-transfer opportunity. However, investment flows will depend on whether these projects require capital investment or entail mere transfer of traffic risk.
Investors expect the formation of a separate regulatory entity for the road sector to provide a stable regulatory regime. Incorporation of a provision for renegotiation in the MCA is required. Moreover, stakeholders should ensure predictability of timelines. Toll price increases should be linked to the wholesale price index and the consumer price index. The investor fraternity also expects the government to make dispute resolution faster and more flexible.