5 Apr 2021 IRCON Gurgaon Rewari Highway Limited
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Press Release IRCON Gurgaon Rewari Highway Limited April 05, 2021 Ratings Facilities/Instruments Amount Ratings1 Rating Action (Rs. crore) Provisional CARE AA- (CE); Stable Long Term Bank 310.00 [Provisional Double A Minus (Credit Assigned Facilities Enhancement); Outlook: Stable] 310.00 Total Bank Facilities (Rs. Three Hundred Ten Crore Only) Details of instruments/facilities in Annexure-1 *Proposed to be backed by unconditional and irrevocable corporate guarantee of IRCON International Limited till the receipt of first annuity. Rating assigned is provisional and shall be confirmed upon receipt of final sanction letter and execution of financing documents, including unconditional, irrevocable corporate guarantee from IRCON International Ltd, to the satisfaction of CARE Ratings Ltd. Unsupported Rating 2 CARE A- [Single A minus] Note: Unsupported Rating does not factor in the explicit credit enhancement Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of IRCON Gurgaon Rewari Highway Limited (IGRHL) primarily factors in the proposed unconditional and irrevocable corporate guarantee of IRCON International Limited (IRCON, rated CARE AAA; Stable/ CARE A1+) till the receipt of first annuity. The rating factors in the inherent strengths of hybrid annuity model (HAM) based road projects such as (i) low project funding risk with inflation-indexed annuity to be received for construction and favourable clauses introduced in the concession agreement (CA) to mitigate project execution challenges (ii) lower post-implementation risk on account of inflation-indexed annuity to be received for operations and maintenance (O&M) of the road and (iii) receipt of bank rate linked interest annuity. The rating also derives strength from the proposed fixed-price engineering, procurement and construction (EPC) contract with IRCON, which has an established track record of constructing roads and highways. Furthermore, the rating takes into account the credit quality of the underlying annuity receivables from National Highways Authority of India (NHAI; rated ‘CARE AAA; Stable’) subsequent to commencement of operations, the proposed liquidity support mechanism such as creation of a debt service reserve account (DSRA) and a major maintenance reserve (MMR), proposed undertaking to be extended by the sponsor, IRCON, to fund any shortfall during the construction period along with articulation by the sponsor, IRCON, that in case of inadequacy of funds at the special purpose vehicle (SPV) level, IRCON will make good any shortfall , by extending bank guarantees (BGs) or maintaining fixed deposits (FDs) to the extent of such shortfall, which is proposed to be a part of financing document as well. The above rating strengths are, however, tempered by the inherent construction risk associated with the project execution, susceptibility to changes in operations and maintenance (O&M) cost and interest rate. Rating Sensitivities Positive Sensitivities Completion of project on or before the scheduled COD and established track record of timely receipt of annuities post commencement of operations thereby leading to build-up of liquidity at the SPV level. Negative sensitivities Deterioration in the credit profile of sponsor (IRCON) or counterparty (i.e. NHAI) Detailed description of the key rating drivers 1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 2 As stipulated vide SEBI circular no SEBI/ HO/ MIRSD/ DOS3/ CIR/ P/ 2019/ 70 dated June 13, 2019. As per this circular, the suffix ‘CE’ (Credit Enhancement) is assigned to the ratings with explicit external credit enhancement, against the earlier used suffix ‘SO’ (Structured Obligation). 1 CARE Ratings Limited Press Release Proposed Corporate guarantee from IRCON International Limited till the receipt of first annuity The detailed rationale of the corporate guarantee provider, IRCON is available on www.careratings.com. As per the proposed corporate guarantee (CG), IRCON unconditionally and irrevocably guarantees that till the receipt of first annuity, in the event of any default on the part of IGRHL in payment/repayment or in the event of any default to comply with any of the terms, conditions and covenants contained in the facility agreements, they will pay to the lenders all the amounts payable under the facility agreements. With this limited-period guarantee, construction and other risks that may materialize till the commissioning of the project gets transferred to the guarantor, thereby providing comfort to the rating. Hybrid annuity structure of the project, with favourable clauses in concession agreement to address execution challenges The concession agreement (CA) – in line with the model CA for HAM projects – includes clauses that serve to partially secure the project and its lenders against construction risks, including delays in land acquisition. Such clauses include stipulating the achievement of at least 80% right-of-way (RoW) as a precedent condition for declaring appointed date (AD) for the project. Besides, there is a provision for granting deemed completion of the project in case 100% of the work is completed on the RoW which becomes available to it within 182 days of the appointed date. In addition, stringent clauses for levy of damages, encashment of performance security as well as requirement of additional performance security in case of delay in execution due to reasons attributed to the concessionaire act as significant disincentives against slippages in execution. The HAM model also entails lower sponsor contribution during construction period considering 40% construction support from NHAI and availability of 10% mobilization advances on bid project cost (BPC). BPC and O&M cost shall be inflation indexed (through a Price Index Multiple [PIM]), which is the weighted average of Wholesale Price Index (WPI) and Consumer Price Index (CPI) in the ratio of 70:30. The inflation-indexed BPC protects the developers against price escalation to an extent. Cash flow visibility due to the annuity nature of the revenue stream linked to inflation-indexed O&M annuity and bank rate linked interest annuity During the operational phase, the project’s cash flow is assured in the form of annuity payments from NHAI on semi- annual basis covering 60% of the project completion cost along with interest at ‘bank rate plus 3%’ on reducing balance and inflation indexed O&M annuity. Low counterparty credit risk Incorporated by the Government of India (GoI) under an Act of the Parliament as a statutory body, NHAI functions as the nodal agency for development, maintenance and management of the National Highways in the country. The outlook on NHAI, as symbolized in its rating, reflects its significance for the GoI and, consequently, the abiding direct and indirect support expected from it for the agency. Fixed-price EPC contract with sponsor, IRCON The company proposes to enter into a fixed price EPC contract with IRCON, which has executed nation building infrastructure projects in roads, buildings, electrical substation and distribution, airport construction, commercial complexes, metro and railway segment. The sponsor has long experience in the construction and infrastructure sector and are ably supported by a team of qualified engineers with significant expertise in road and highway construction. Maintenance of surplus for meeting exigencies in the operational period and proposed DSRA The sponsor has proposed an upfront creation of a debt service reserve account (DSRA) for three months of interest servicing requirement, on the receipt of the first annuity. Additionally, based on articulation by IRCON, the SPV will retain surplus funds out of annuity receipt in the form of fixed deposits at all the times to make good towards any shortfall which may occur towards debt servicing for the period ahead. Further, in case of any inadequacy of funds at SPV level, IRCON shall be extending bank guarantees (BGs) to the extent of such shortfall, which is proposed to be a part of financing document. Key Rating Weaknesses Inherent project execution risk 2 CARE Ratings Limited Press Release IGRHL is exposed to the inherent construction risk attached with road projects given the construction on the project has not commenced yet as the AD has not been declared by NHAI. Nevertheless, demonstrated track record of IRCON as an EPC contractor in executing large sized projects mitigate the execution risk to an extent. Inherent O&M risk associated with project While the inflation-indexed O&M annuity partly mitigates O&M risk, the disparate movement in inflation index (70% WPI; 30% CPI) and the O&M cost heads poses a risk. Besides, the company could face the risk of a sharp increase in the O&M cost in the event wear and tear on the road is more than the levels envisaged during bidding. However, IGRHL proposes to enter into fixed-price and fixed-time O&M contract (including routine and major maintenance) with the sponsor mitigating O&M risk to an extent. Inherent interest rate risk IGRHL is exposed to inherent interest rate risk considering the floating rate of interest. Reimbursement of the interest cost in the form of interest annuity payable by NHAI biannually at bank rate plus three per cent mitigates the risk only to an extent, since there could be disparity between movements in bank rates and in lenders’ benchmark rates. Liquidity: Adequate The financial closure for the project in underway and appointed date (AD) is awaited. Analytical Approach: Proposed