(The following statement was released by the rating agency)
June 05 - Fitch Ratings has affirmed Jorbat Shillong Expressway Limited’s (JSEL) INR7,000m senior long-term rupee loans at ‘Fitch BBB+(ind)’ and its INR400m subordinated loans at ‘Fitch BBB(ind)'. The Outlooks are Stable.
The affirmation reflects the project’s continued construction progress, with only a marginal physical delay of 6.7% due to some delays in hill cutting, as per the April 2012 independent engineer’s report. The report continues to expect the project to achieve the commercial operations date (COD) on schedule by January 2014. Completion risk is mitigated by the existence of a fixed-price engineering, procurement and construction contract with IL&FS Transportation Networks Limited (ITNL, one of the project sponsors) and the sponsors’ unconditional and irrevocable undertaking to fund construction cost overruns.
Fitch notes that construction of this project is complex due to the hilly terrain and long monsoon period in Meghalaya and Assam where the project is located. Also, the engineer’s report flags acquisition of forest land (4% of total required) and right-of-way for a bypass as potential areas of concern. However, land acquisition is the responsibility of the grantor, the National Highways Authority of India, (NHAI; ‘Fitch AAA(ind)'/ Stable) and the concession agreement allows for a provisional COD to be granted if a portion of land acquisition is still pending.
The ratings also reflect Fitch’s expectations of sponsor support given the various unconditional and irrevocable undertakings provided by the two project sponsors - ITNL (49.9%) and Ramky Infrastructure Limited (Ramky, 50%). Besides the undertaking to fund construction cost overruns, the sponsors have also undertaken to arrange for short-term funding to meet interest payments and operation and maintenance (O&M) costs during the six months between the COD and the receipt of the first annuity. They have also undertaken to fund any overruns in major maintenance expenditure.
Revenue for this project will be derived from availability-based semi-annual annuity payments from the NHAI of INR725.1m. These annuity payments are subject to deductions for underperformance and lane unavailability. However, some comfort is drawn from JSEL’s fixed-price O&M contract with ITNL and the latter’s experience as an operator. Also, Fitch’s stress scenarios indicate that the project’s debt service coverage ratio (DSCR) is able to withstand a reasonable amount of revenue deductions.
The ratings are constrained by the project’s structural weaknesses, including the lack of a debt service reserve account, a reserving mechanism for major maintenance expenditure (though mitigated by the sponsor’s undertaking to fund overruns) or dividend lock-up covenants. Also, refinancing risks stem from the fact that 15% of the debt is repayable in a bullet instalment, though are mitigated by a five year tail in the concession agreement. While revenue risk is low, these structural weaknesses combined with thin coverage metrics (Fitch’s base case minimum senior DSCR: 1.05x) increase the project’s sensitivity to stress scenarios. Although the risk of a variable interest rate is mitigated during construction by the sponsor’s undertaking to fund project cost overruns, the project will be exposed to interest rate risks once it becomes operational. Interest rates increased to a weighted average of 12.10% on the senior debt and 13.53% on the subordinated debt in 2012 from 11.7% and 13.2% in 2011, respectively.
The one-notch difference between the senior and subordinated debt ratings reflects the latter’s structural subordination and lower DSCR. The small amount of the subordinated debt has capped the rating differential to one notch. Any failure to comply with the various sponsor support undertakings could result in a rating downgrade. Successful completion of the project, liquidity support up to the receipt of the first annuity, and a track record of receiving timely annuity payments could result in a rating upgrade.
JSEL is a special purpose company, incorporated to implement a lane expansion project under the build-operate-transfer annuity model. It has a 20-year concession (expiring in January 2031) from NHAI to design, construct, develop, finance, operate and maintain a 61.92km stretch between Jorbat (Assam) and Barapani (Meghalaya) on National Highway-40. The estimated project cost of INR8,240m is being funded by a senior term loan of INR7,000m, subordinated debt of INR400m and sponsor equity of INR840m.