ICRA Ratings has said that all road projects will likely get an extension in the construction period for the lockdown period under force majeure political event. In addition, these projects will also get reimbursement of cost escalation which covers both inflation-linked increases in construction cost and interest payments on debt due for the period of lockdown. As of December 31, 2019, there are 181 projects totaling 13,670 km with a total project cost of Rs. 2,20,294 crore awarded under public-private partnership route which are under construction (this excludes projects for which appointed date has not been announced).
Elaborating further, Mr. Shubham Jain, Senior Vice President, Corporate Ratings, ICRA says, “BOT projects are well protected from both time and cost overruns on account of lockdown. As it is for HAM projects, the bid project cost is adjusted for inflation (price index multiple). Therefore, for NHAI the additional burden will be in terms of reimbursing the interest on debt due for all BOT projects along with cost escalation for BOT-Toll and BOT-Annuity projects. This is estimated to be Rs. 1,329 crore for the 40-day lockdown period.”
The bigger risk exists for HAM projects, as their inflows are directly linked with prevailing bank rates. Post the revision in the repo rates in March 2020, the bank rate stands reduced to 4.65% (historic low) from 5.4% earlier. The highest bank rate in the last two decades was at 10.3%. 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 account for around 45% of total inflows. Therefore, the sustained low-interest-rate regime is a challenge for operational BOT-HAM projects. ICRA in its earlier research dated February 2020 has highlighted declining interest rates as a major risk for HAM projects.
Mr. Jain added, “The interest rates are expected to remain at low levels to revive growth and mitigate the impact of COVID-19 on the economy. The decline in bank rate would reduce the overall inflows for a HAM project thereby adversely affecting its debt coverage metrics. For every 25-bps decline in the bank rate, the cumulative DSCR for HAM projects reduces by 2 bps and hence low bank rate remains a potent risk for the viability of HAM projects. Further, the returns to HAM developers (equity IRR) is expected to shrink by 125-375 bps depending on the trajectory in interest rates.”
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 year. These projects are likely to get more impacted. Given that the DSCR cushion is relatively thin for hybrid annuity projects; the impact of the decline in bank rate is more severe on HAM projects.
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