Press Release IRCON Gurgaon Rewari Highway Limited August 06, 2021 Ratings Facilities/Instruments Amount Ratings1 Rating Action (Rs. crore) CARE AA- (CE); Stable* 309.68 Final Rating Long Term Bank Facilities [Double A Minus (Credit (Reduced from 310.00) Confirmed** Enhancement); Outlook: Stable] 309.68 Total Bank Facilities (Rs. Three Hundred Nine Crore Sixty-Eight Lakh Only) Details of instruments/facilities in Annexure-1 *Backed by unconditional and irrevocable corporate guarantee of Ircon International Limited (IRCON, rated CARE AAA; Stable/ CARE A1+) valid till 180 days from Commercial operations date or the receipt of first annuity whichever is later. **Final rating has been confirmed on account of receipt of the executed copy of unconditional and irrevocable corporate guarantee of Ircon International Limited (IRCON) and other financing documents 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 unconditional and irrevocable corporate guarantee of Ircon International Limited - a Government of India Enterprise and a Mini Ratna Category – I public sector undertaking (IRCON, rated CARE AAA; Stable/ CARE A1+) valid till 180 days from Commercial operations date or the receipt of first annuity whichever is later, thereby covering the entire construction period. 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 fixed-price engineering, procurement and construction (EPC) contract with IRCON, which has an established track record of constructing roads and highways. Furthermore, the rating factors favourably, the credit quality of the underlying annuity receivables from National Highways Authority of India (NHAI; rated ‘CARE AAA; Stable’) subsequent to commencement of operations and the proposed liquidity support mechanism such as creation of a debt service reserve account (DSRA) and a major maintenance reserve (MMR). The rating also takes into account the undertaking extended by the sponsor, IRCON, to fund any shortfall during the construction period and to cover any deficiencies in O&M and major maintenance for the entire debt tenure. CARE understands that the sponsor IRCON, will ensure adequate surplus funds from the annuity receipts are maintained at the SPV level as a liquidity mechanism besides extending need-based support to IGRHL towards timely debt servicing. Further, lower debt to bid project cost with a tail period of four years is viewed favourably. 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 during the tenure of the project debt. 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 IGRHL. Negative sensitivities Deterioration in the credit profile of sponsor (IRCON) or counterparty (i.e. NHAI). Absence of need-based support from IRCON. 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 Detailed description of the key rating drivers Key rating strengths 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 corporate guarantee (CG), IRCON unconditionally and irrevocably guarantees that till 180 days from Commercial operations date or the receipt of first annuity whichever is later, 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 has entered 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. Comfortable debt coverage indicators on account of low project leverage The project is being financed at a debt-equity ratio of 3:1. The total debt envisaged stands at Rs.309.68 crore against the bid project cost (BPC) of Rs.900 crore, which is relatively lower at 34.41% of the BPC, leading to comfortable debt coverage indicators. The project also has a tail period of four years providing financial flexibility. Maintenance of surplus for meeting exigencies in the operational period and proposed DSRA As per sanction terms, a debt service reserve account (DSRA) equivalent to one quarter of interest obligation and one half- yearly principal has been proposed to be created up on the receipt of the first annuity, of which the sponsor has provided an undertaking for an upfront creation of three months of interest servicing requirement, on Commercial operation date (COD). Additionally, CARE believes that the sponsor IRCON, will ensure adequate surplus funds from the annuity receipts are maintained at the SPV level as a liquidity mechanism besides extending need-based support to IGRHL towards timely debt servicing. Key Rating Weaknesses Inherent project execution risk IGRHL is exposed to the inherent construction risk attached with road projects given the construction on the project has not commenced yet as the appointed date (AD) has not been declared by NHAI. Nevertheless, demonstrated track record of IRCON as an EPC contractor in executing large sized projects mitigates the execution risk to an extent. 2 CARE Ratings Limited Press Release Inherent O&M risk associated with project While the inflation-indexed