By Chintan Lakhani

India Ratings and Research (Ind-Ra) has assigned IRB InvIT Fund (IRB InvIT) a long-term senior debt rating of ‘IND AAA’. The Outlook is Stable.

The rating reflects IRB InvIT’s strong ability to meet its external senior financial obligations, including that of the entities under it. Post issuance, IRB InvIT’s consolidated external debt would be INR7,704.55 million on 31 March 2017. The rating on IRB InvIT is a reflection of the combined credit quality of the underlying assets.  This is not a rating of the units of IRB InvIT. The rating should not be construed as the rating for the existing outstanding debt of each special purpose vehicle (SPV). 

Ind-Ra expects significant deleveraging (77.5% of the INR35.13 billion debt on 31 December 2016) of the operational toll road projects post receipt of subscription proceeds, resulting in robust coverage metrics and favourable gearing. The overall operational track record of the combined portfolio (around 4.5 years) and highly fungible cash flows of InvIT structure bolster the overall credit profile. IRB InvIT’s cash flows show considerable resilience to stress cases, reflecting ample cushion for timely debt servicing in potential downside scenarios. The debt infused by IRB InvIT in the SPVs shall be subordinate to the external debt and IRB InvIT shall not have a right to call an event of default under any project documents and/or any financial documents until the external debt is fully paid off. 

INVIT PROFILE 

IRB Infrastructure Developers Limited (
IRBIDL, ‘IND A-’/Rating Watch Positive) has floated an infrastructure investment trust and intends to house six operational SPVs under it. The SPVs are IDAA Infrastructure Pvt Ltd (IDAA), IRB Surat Dahisar Tollway Private Ltd (IRBSD), IRB Talegaon Amravati Tollway Pvt Ltd, IRB Jaipur Deoli Tollway Pvt Ltd), IRB Tumkur Chitradurga Tollway Pvt Ltd and M.V.R Infrastructure and Tollways Pvt Ltd. Ind-Ra rates the bank facilities of the first four SPVs. IRB InvIT plans to raise INR43 billion as a fresh issue. The proceeds are likely to be used for the repayment of around 77.5% of the external outstanding debt (INR35.13 billion on 31 December 2016) and the entire sponsor debt of around INR14 billion. Subsequently, the credit profile of the entities would change significantly, which has been factored into the rating. 

The subscription process for IRB InvIT’s units will be similar to the initial public offer process. Proceeds from the subscription of units will be used in deleveraging operational SPVs. Post issuance, 
IRBIDL is likely to hold 25% of units in IRB InvIT. 

INVIT OVERVIEW

IRB InvIT was established under Indian Trusts Act 1882 by signing Indenture of trust dated 16 October 2015 with the trustee (IDBI Trusteeship Services Limited). The trustee would monitor IRB InvIT’s operations in relation to its investment objectives and compliance with applicable regulations. IRB InvIT received the certificate of registration as an Infrastructure Investment Trust on 15 March 2016 under the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations 2014 (InvIT regulations). As required by InvIT regulations, IRB InvIT has appointed IRB Infrastructure Private Limited (
IRBIPL) and Modern Road Makers Private Limited as the investment manager and project manager, respectively. IRB InvIT would receive principal and interest payments on the debt lent to the portfolio assets apart from the dividends from the SPVs.  

IRB InvIT shall replace all existing termination payments, shortfall guarantees and undertakings given by
IRBIDL in respect of each loan facility. Although the SPVs shall continue to have separate escrow accounts, the structure of IRB InvIT would ensure that any debt service shortfall in one entity would be bridged by the surplus cash flow in any other entity. Distribution to unit holders from InvIT shall happen once in six months, only after fulfilling the external debt obligations of all SPVs.  

KEY RATING DRIVERS

Likely Strong Coverage Metrics: Ind-Ra expects the deleveraging to improve the combined debt-equity ratio to 0.15x post the issue from the current 1.44x (on 30 September 2016). This is also visible in the projected coverage metrics in the base case with a healthy minimum debt service coverage ratio of 3.3x (in FY23) and loan life coverage ratio of 5.1x. Ind-Ra assumes that, in line with the provisions of the existing bank loan agreements, the SPVs shall continue to hold existing debt service reserve account equivalent to three months of debt service obligations. The debt/EBITDA and loan-to-value ratio are projected to be around 0.88x and 11.8% in FY18 in Ind-Ra’s base case projections. Ind-Ra assumes that the maximum debt outstanding on 31 March 2017 will not exceed INR10 billion i.e. around 12.5% of the existing valuation of INR80 billion. 

Robust Pool of Operational Assets:
The rating reflects the robustness of cash flows from a pool of six operating toll road assets with average operational life of more than 4.5 years. Two projects (IDAA and IRBSD), which accounted for 54% of the total revenue of all SPVs in FY16, registered a revenue CAGR of around 9% in FY16, The average year-on-year revenue growth rates for each of the six SPVs has been upwards of 8% for FY16. That being said, Ind-Ra’s projections factor in a moderated revenue growth rate assumption for all the assets. Out of the six projects, toll rates of three (IDAA, IRBSD, M.V.R Infrastructure and Tollways) are 100% linked to Wholesale Price Index and for rest of the projects the toll rates are partially (40%) linked to Wholesale Price Index, apart from a fixed escalation of 3%. 

Improved Credit Metrics due to Premium Deferment:
The rating reflects IRB Tumkur Chitradurga Tollway project’s improved coverage metrics due to a premium deferment for FY15-FY24. Till the amounts of deferred premium are paid or recovered, they shall all times carry an interest rate equal to 2% above the bank rate. The overall impact on the cash flows due to the premium deferment is INR4.05 billion. In case project revenues are more than projections submitted to National Highways Authority of India (‘IND AAA’/Stable) the latter will have the right to advance the payments, which shall be in consultation with senior lenders. 

Established Sponsor Group Track Record:
IRBIDL is one of the largest infrastructure development and construction companies in India. Apart from the six InvIT assets, IRBIDL had 14 road projects as of 30 June 2016, of which eight were operational and four were under construction. The group’s ability and inclination in supporting its projects cannot be undermined, as is well demonstrated in the projects rated by Ind-Ra. 

Acquisitions Shall Hold Key:
Although the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations 2014 (InvIT regulations) allow acquisitions of under construction assets, the investment manager of IRB InvIT intends to acquire only operational assets based on yield thresholds, traffic characteristics, residual concession period etc. The fund shall have the right of first offer on the existing and future assets of the sponsor group and will enter into a deed of right of first offer and right of first refusal, future asset agreement in relation to the same. 

IRBIPL, the investment manager, has 18 years of experience in operating a road asset on a build operate and transfer basis. IRBIPL would assess potential acquisitions and shall propose the same for the decision of unit holders. 

Low Operational Risk:
The O&M costs, projected by the management, are based on historical numbers for each project. O&M costs have been vetted by GMD Consultants – an independent third party, and the average costs are largely comparable to the average cost of Ind-Ra rated peers. Debt service coverage metrics remain strong even in Ind-Ra’s stress case scenarios for routine O&M and major maintenance costs. Considering the IRB group’s vast experience in the highway sector, O&M (both routine and periodic maintenance) of the project stretches is not likely to be a concern.


RATING SENSITIVITIES

Future developments that may, individually or collectively, result in a negative rating action are: 

-  higher-than-expected outstanding debt
- deterioration in the underlying asset quality and inclusion of under construction assets/weak entity in the portfolio
- any systemic risk affecting the highway sector resulting in a significant decline in revenue increasing the risk of non-payment of external debt and obligations significantly
- any adverse regulatory changes or non-receipt of regulatory approvals



COMPLEXITY LEVEL OF INSTRUMENTS

External debt of InvITs is an instrument with high complexity levels where the relationship between numerous interdependent risk factors and intrinsic return characteristics is highly involved, requiring a forward-looking analysis and projections.


SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. 

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Chintan Lakhani

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001790

    Committee Chairperson

    Venkataraman Rajaraman

    Senior Director and Head Infrastructure and Project Finance
    +91 44 43401702

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121