GMR Ambala - Chandigarh Expressways Private Limited: Rating Reaffirmed
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August 07, 2020 GMR Ambala - Chandigarh Expressways Private Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Fund-based -Term Loan 240.34 236.48 [ICRA]BB(Stable); reaffirmed Total 240.34 236.48 *Instrument details are provided in Annexure-1 Rationale The rating reaffirmation of GMR Ambala-Chandigarh Expressways Private Limited (GACEPL) factors in its stable operational performance with moderate growth in toll collections in FY2020, and completion of the second major maintenance for the project stretch. The rating continues to draw support from the importance of the project stretch with an operational track record of more than 10 years, and extensive experience of the promoter group in the infrastructure sector. The rating is constrained by the significantly lower-than-expected toll collection in the project, which has resulted in modest credit metrics and dependence on promoter/Group support in the past. The ratings are also constrained by traffic-related risks inherent in a toll road project, including the risk of traffic diversion, resistance of users to pay toll, and growth in toll-paying traffic. ICRA has noted that the Covid-19 pandemic and measures to control its spread (including lockdown) had impacted toll collections during the last four months and remains a risk in the near to medium term. However, some comfort is derived from the significant ramp-up in the toll collections since May 2020 post lockdown relaxations (average toll collections reaching ~75% of pre Covid-19 toll collections in June–July 2020). GACEPL is exposed to the O&M risk associated with the project, including routine and periodic maintenance within budget and time. GACEPL’s cash flows are exposed to interest rate risk, as it has floating nature of interest rates for the term loans. ICRA notes that the ongoing arbitration related to the compensation sought by GMR Ambala Chandigarh Expressways Private Limited (GACEPL) from the National Highway Authority of India (NHAI) for loss of toll revenues due to diversion of traffic to alternate routes is still ongoing. The outcome of the arbitration, which was expected earlier in FY2020, is now anticipated in FY2021 as per the management. A prolonged delay in realisation of the compensation is likely to have an adverse impact on the company’s liquidity and credit metrics as the debt repayments are ballooning. Further, the project involves payment of negative grant (balance amount excluding interest is Rs. 66.41 crore) to the NHAI, for which stay orders were passed by the arbitration tribunal (AT) in August 2013 and March 2015. However, recently the NHAI has filed application for vacation of the same. As the matter is sub-judice, it will be one of the rating sensitivities, and any adverse order can put additional pressure on the SPV’s cash flows. ICRA notes that the company has availed moratorium on its existing term loans for a period of six months from March 1, 2020 to August 31, 2020 under the Reserve Bank of India’s (RBI) Covid-19 relief package. 1 Key rating drivers and their description Credit strengths Stable operational performance – The toll collections growth remained moderate at around 5% in FY2020, supported by traffic growth and timely toll rate hike. However, the toll rates have not increased for passenger vehicles (PVs), which constitute for a large share of traffic, due to rounding off by Rs. 5. GACEPL derives more than 80% of its traffic from PVs, which have comparatively lower toll rates and has WPI-linked escalation in toll rates, which considers the average WPI for the 12 months of a financial year. ICRA has noted that the Covid-19 pandemic and measures to control its spread (including lockdown) had impacted toll collections during the last four months and remains a risk in the near to medium term. However, some comfort is derived from the significant ramp-up in the toll collections since May 2020 post lockdown relaxations (average toll collections reaching ~75% of pre Covid-19 toll collections in June–July 2020). The company has completed its second major maintenance in FY2019–FY2020. Importance of project stretch and long operational track record – The project started commercial operations in December 2008 and has a track record of successful operations and maintenance. The GMR Group’s expertise in the road sector also adds to the comfort. The rating continues to draw support from the importance of the stretch, considering that it connects Delhi to Chandigarh and other important destinations of Punjab and Haryana. The road forms a gateway to major tourist locations of Himachal Pradesh (Shimla and Kullu/Manali) in the North. Experienced promoter with demonstrated support in the past – The lower-than-expected traffic on the project stretch post completion led to dependence on financial support. The GMR Group supported the project by way of fund infusion in the form of preference shares and unsecured loans. Further, the Group supported the funding of the last periodic maintenance expenditure that GACEPL incurred. Credit challenges Uncertainty related to ongoing arbitration case – In February 2010, GACEPL had filed claims for compensation from the NHAI on account of losses due to traffic diversion to alternate routes and invoked the arbitration clause in the concession agreement for the same. The arbitration tribunal was formed to resolve the dispute and the matter is now in advanced stages. However, the progress has been slower than expected. The outcome of the arbitration, which was earlier expected in FY2020, is now anticipated in FY2021, as per the management. A prolonged delay in realisation of the compensation can have an adverse impact on the company’s liquidity and credit metrics as the debt repayments are ballooning. Further, the NHAI has filed for vacation of stay order passed by the AT on the payment of negative grant of Rs. 66.41 (excluding any interest accrued) by the company. The matter is sub-judice and will continue to be one of the rating sensitivities, as any adverse order can put additional pressure on the SPV’s cash flows and would require significant financial support from the promoters. However, a favourable verdict for GACEPL regarding the arbitration claims is expected to aid an improvement in its liquidity position and credit profile (depending on the quantum of award and realisation of the same). Funding gap for SPV due to lower-than-expected traffic – Due to lower-than-initially-expected traffic on the stretch, given the diversion of traffic to alternate routes, the toll collections have remained weak and insufficient to meet its overall expenses as well as debt servicing requirements in the past. Nonetheless, GACEPL received support from the GMR Group. While restructuring its term loans in FY2016 helped to ease the medium-term cash flow pressure, the company’s cash flows remained insufficient to fund its major maintenance expenses in FY2019–FY2020, which was supported by extension of credit from the Group entities. However, with the completion of major maintenance, improved toll collections (post ramp-up in traffic to pre Covid-19 levels) and lower debt obligations over the next one- two years, its cash flows are expected to remain sufficient in the near term. Further, comfort is derived from its DSRA of ~Rs. 6.3 crore covering around two to three months of interest. 2 Exposure to risks inherent in BOT road projects – Like any toll road project, the company remains exposed to the risks inherent in BOT road projects such as political acceptability of rate hikes linked to WPI year after year over the concession period, challenges arising from non-completion of adjacent/contiguous routes, and risks related to traffic leakage, traffic diversion, user resistance to pay toll, etc. It also faces O&M risk associated with the project, including routine and periodic maintenance within the budget and time. GACEPL’s cash flows are also exposed to interest rate risk, as it has floating nature of interest rates for the term loans. Liquidity position: Stretched The company’s liquidity position is stretched with accruals from operations expected to be only sufficient to meet its operational expenses and debt servicing obligation over the near term. However, with increasing repayment obligations, the company would remain dependent on timely promoter support. It has availed moratorium for debt servicing from March 2020 to August 2020, and consequently GACEPL’s cash, bank balance, and liquid investments has built up to Rs. 4.74 crore as on May 31, 2020. However, once the moratorium ends, these would be utilised towards debt servicing. The company has a DSRA of Rs. 6.26 crore, which can be utilised in case of a shortfall. Rating sensitivities Positive triggers – The rating could be upgraded if the company receives the arbitration claims, to be used for debt reduction, or if significantly higher toll collections results in improvement of coverage indicators on a sustained basis. Negative triggers – Downgrade pressure on the rating could arise if weaker-than-expected toll collections result in deterioration of debt coverage ratios. The rating can also come under pressure in case of any prolonged delay in the arbitration outcome or any adverse decision on the arbitration or in case the negative grant payable to the NHAI becomes due. Analytical approach Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies BOT Toll Road Projects in India Parent/Group Support Not applicable Consolidation/Standalone The rating is based on the standalone financial profile of the company About the company GACEPL is a wholly-owned subsidiary of the GMR Group—GMR Highways Limited (51.65%), GMR Infrastructure Limited (23.69%), GMR Energy Limited (24.66%). GACEPL is an SPV set up for executing a build operate transfer (BOT) toll-based project on a 20-year concession agreement (ending in May 2026) with the NHAI.