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ICRA: Three out of five HAM projects witnessing delays in execution

ICRA: Three out of five HAM projects witnessing delays in execution

An ICRA note has indicated that, out of the total 117 hybrid annuity road projects awarded during January 2016 to March 2019, 90% of the projects have achieved financial closure (FC) (ie, 107 out of 117 projects). The time taken to achieve FC has also reduced considerably by more than 50% from 430 days in FY2016 to 194 days in FY2019. An area of concern is that owing to challenges in land acquisition, the median gap between the award date and announcement of appointed date (AD) has been significant in the range of 309-368 days and for projects awarded in FY2019 it stood at 507 days. As on December 31, 2019, 4% of projects awarded in FY2018 and 95% of them awarded in FY2019 are yet to receive appointed date.
Elaborating further, Rajeshwar Burla, Vice President, Corporate Ratings, ICRA says, “Till date, out of 24 projects due for completion, 15 ie, around 63% of them have witnessed delays in execution. Of the delayed projects, around 40% are on account of reasons attributable to the sponsor – primarily delay in equity infusion due to tight liquidity/ deteriorated credit profile of the sponsor. In 20% of the cases the reasons are solely attributable to the authority (right of way (RoW) related), in 33%, the reasons are attributable to both the authority and the sponsor (both RoW and delay in equity infusion); and in the remaining 7% it is on account of force majeure (FM) events (heavy rains and floods). For projects where the delays are attributable to the authority or FM events, the NHAI has granted an extenion of the timeline.”
Seven HAM projects have attained a provisional completion certificate and two more are in the process of attaining the same (applied and final approval awaited). Around 23 projects totaling 1,493 km are expected to become operational in the next one year. These present significant refinancing opportunities. Overall, around 32 projects involving Rs.13,986 crore of debt are candidates for refinancing through money market issuances where the investors prefer operational assets.
During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate). Overall, such interest receipts accounts for around 45% of total inflows. Further, interest amount dominates the inflows from commercial operations date (COD) till seventh year of operations. As a result, the adverse impact of a decline in the bank rate is more prominent in this period. With fixed annuity payments dominating the inflows from the eighth year onwards, the impact of change in bank rate is lower in the later part of the operations period. 
Burla added, “On one hand, the transmission of reduced interest rates happens with a lag for the project loan. On the other, such transmission is immediate in case of the interest to be paid by the authority on the reducing balance of completion cost. Decline in bank rate would reduce the overall inflows for a HAM project while the fixed nature of the O&M expenses and the relatively higher interest expense on project loan (given the delayed transmission) would adversely impact the debt coverage metrics. Therefore, declining bank rate is a potent risk for viability of HAM projects.”
During first three years post COD; for every 25 bps decline in bank rate, the reduction in annual debt service coverage ratio (DSCR) is in the range of 3-5 bps. This reduces going forward; towards later years the reduction is in the range of 1-2 bps. On a cumulative basis, for every 25 bps decline in the bank rate the cumulative DSCR reduces by 2 bps. Given that for hybrid annuity projects the DSCR cushion is relatively thin; interest rate sensitivities are important and the impact of decline in bank rate is more severe on minimum DSCR.
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