Infrastructure project financing using special purpose vehicles (SPVs) may come under significant risk as a result of SPVs’ interpretation of an order issued by National Company Law Appellate Tribunal against Infrastructure Leasing & Financial Services Limited (IL&FS; ‘IND D’) and its subsidiaries, says India Ratings and Research (Ind-Ra).

Citing the order, Jharkhand Road Projects Implementation Company Limited (JRPICL; debt rated at ‘IND AA(SO)’/RWN) and West Gujarat Expressway Limited (WGEL, debt rated at ‘IND A(SO)’/RWN) wrote to their trustees last week demanding a refund of debt payments made after 15 October 2018 and expressing an intention to stop further repayments. The next debt servicing for JRPICL and WGEL is scheduled on 21 January 2019 and 31 January 2019, respectively; Ind-Ra understands that the companies continue to generate sufficient cash, and expects lenders to instruct the trustees and the escrow bank to release the payments. However, if JRPICL and WGEL are able to stop the payments, then the ratings on the bonds will have to be downgraded to ‘IND D’ in line with The Securities and Exchange Board of India regulations which direct credit rating agencies to recognise defaults on  the ‘one day one rupee’ principle. Importantly, such defaults by JRPICL and WGEL (and any other IL&FS SPV) will not only destabilise all their ratings but also raise question on the effectiveness of their ring-fenced structure. 

Ind-Ra rates the operational SPVs of IL&FS Transportation Networks Limited (
‘IND D’), which have a well-defined waterfall mechanism for project finance, backed by a ring-fencing mechanism from project cash flows. The ring-fenced and escrow structure enables the project cash flows to remain intact until debt obligations and other covenant are met and financial agreements ensure reasonable remoteness to the sponsor’s bankruptcy. Therefore, irrespective of sponsor’s credit profile (subject to O&M performance), the ring-fencing mechanism ensures debt service. Consequently, the SPV’s ratings are often different from the sponsor rating. 

Lenders to the following IL&FS SPV’s rated by Ind-Ra are exposed to the risk of any move by these companies to stop future debt repayments, like JRPICL and WGEL. A financial event of default could also translate into an event of default in many concessions and result in the termination of projects. 

NCD Issuances of IL&FS SPVs Rated by Ind-Ra

SPVs

Rating/Rating Watch

Jharkhand Road Projects Implementation Company Ltd

IND AA(SO)/RWN

Hazaribagh Ranchi Expressway Ltd

IND AAA(SO)/RWN

Jorbat Shillong Expressway Ltd

IND AAA(SO)/RWN

North Karnataka Expressway Ltd

IND AA+(SO)/RWN

West Gujarat Expressway Ltd

IND A(SO)/RWN

Source: Ind-Ra

Note: All the projects rated ‘IND AA(SO)’ and above have debt service reserve accounts equivalent to at least six months

 

Ind Ra rates infrastructure SPV debt of over INR1.6 trillion with a well-defined payment waterfall mechanism. Efficacy of such structure will come into question when a legal loan agreement is overridden. Furthermore, the lenders and investors in these assets may no more depend on or appraise project cash flows alone, but will have to appraise projects of the weakest entity in the group and price it accordingly. 

Generally, a project finance structure is rated on the basis of a steady stream of cash flows from the counterparties, comfortable cash flows and robust liquidity position. The ratings are supported by the transaction documents and rights of the investor/lenders/trustees to monitor the cash flow waterfall arrangement and their steps in rights when the situation demands. Many SPVs maintain at least a six-month equivalent of debt service reserve and have commensurate debt service coverage ratios. Furthermore, the financing document refers to distribution payment conditions which constrain payments to the sponsor, thereby ring-fencing the SPVs. However, if the project entities decide to interpret the tribunal order and fail to service debt, despite adequate cash availability, in contravention to the spirit of the financing documents, it will result in a multi-notch downgrade. 

Globally, infrastructure project finance issuances are appraised basis the well-defined payment mechanism with ring-fenced structures. Such global practices are imbibed in the fledging Indian market. Failure to adhere to such structures, which are critical for long-term infrastructure financing, could increase the risk premium on such funding and even put future debt issuances at risk.

It will helpful to see a public clarification of the legal position of the SPVs (ring-fenced) executing and operating public-private partnership projects vis-à-vis a subsidiary, and perhaps even a separate enactment for public infrastructure projects operating on the SPV mechanism.

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.

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Applicable Criteria

  • Rating criteria not avaiable.

Analyst Names

  • Vishal Kotecha

    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 40356136

    Siva Subramanian

    Director
    +91 44 43401704

    Asim Sharma

    Analyst
    +91 11 43567245

    Vineeta Jha

    Analyst
    +91 22 40356117

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121