new

Infrastructure & Project Finance

www.indiaratings.co.in 1 February 2013


2013 Outlook: Indian Infrastructure Some Encouraging Signs but Fundamental Challenges Remain

Outlook Report

Rating Outlook

Outlook Negative for 2013: Overall, India Ratings has maintained a negative outlook for

infrastructure projects for 2013. However, some subsectors have a split outlook. Certain

pockets in the transportation sector have a stable outlook but the credit profiles of several

power projects – particularly coal based – remain under pressure.

A combination of low rating levels – 35% in the non-investment grade and another 35% at ‘IND

BBB-’ – and high proportion of downgrades (25%) in 2012 contribute to a majority (78%) of

Outlooks on individual projects remaining Stable. That being said, event-based triggers could

yet precipitate project-specific rating downgrades through 2013.

Market Optimism vs. Fundamental Risks: A slew of policy initiatives announced by the

federal government in 2012, particularly in the last quarter, have kindled a sense of optimism

among market participants. The policy initiatives include a presidential directive to the state-

owned Coal India Ltd to sign fuel supply agreements, restructuring of distribution utilities,

constitution of the Cabinet Committee on Investments and the likely introduction of the Land

Acquisition Bill in the ensuing Budget session of Parliament.

However, India Ratings believes that expectations of an immediate revival in the fortunes of the

sector are somewhat misplaced. This is because the process of addressing fundamental

challenges through concrete and sustained on-the-ground actions to repair damaged credit

quality is likely to be protracted.

Loan Restructuring and Defaults: India Ratings expects that in 2013 a number of projects

are likely default to on their bank debt obligations or alternatively the lenders might be

compelled to approve forced debt restructuring packages. This is in view of their weak financial

structures, and with multiple risks including construction delays, plant stabilisation issues and

fuel supply constraints in the power sector and traffic under-performance in the transportation

sector. Reduced sponsor capacity to extend support would also likely contribute to this

phenomenon.

Impact of Macro-economic Headwinds: Some of the macro-economic variables - pick up in

GDP growth rate, abatement of inflationary pressures and the expected drop in interest rates –

may turn favourable during 2013. This may result in cash flows of infrastructure projects

experiencing some improvement though the ‘lag’ effect would imply that benefits are unlikely to

accrue immediately.

Sponsors’ Role Increased but Capacity Diminished: The role played by sponsors – both

through explicit, contractual agreements as also extension of temporary, adhoc lifelines – is

central to the preservation of the credit profiles of several projects. Given weak financial

structures and exacerbation of project risks, demands for sponsors’ resources are likely to

increase.

In a harsh environment, where the ratings of many sponsors are under pressure and when they

face challenges in raising equity (notwithstanding the general buoyancy in the stock markets)

as well as in effecting sales of distressed assets, their ability and willingness to support projects

will come under strain. This may force developers to selectively support projects that have a

Rating Outlook

N E G A T I V E

Summary of Outlooks Sector 2011 2012 2013

Toll roads

Stable Stable to Negative

Stable to Negative

Airports Stable Stable to Negative

Stable to Negative

Minor Seaports

Stable to Negative

Thermal power projects

Stable Negative Negative

Biomass projects

Stable Negative Negative

Wind energy projects

- - Stable to Negative

Source: India Ratings

Related Research

Other Outlooks www.indiaratings.co.in/outlooks

Analysts

Srinivasan Nandakumar +91 44 4340 1710 [email protected] Venkataraman Rajaraman +91 44 4340 1702 [email protected]

Figure 1

18%

78%

4%

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Positive Stable Negative

Rating Outlooks

(%)



2013 Outlook: Indian Infrastructure

February 2013 2

long-term economic value in contrast to their earlier strategy of attempting to preserve vital

bank relationships by propping up all projects.

What Could Change the Outlook

Immediate concrete action on policies already announced could be one of the triggers for an

outlook revision to stable. Simultaneously, sustained efforts at clearing bottlenecks that would

facilitate smoother project completion (e.g. land acquisition and permits) and continued

operations (such as ensuring fuel supply for completed power projects) could also alleviate

some of the risks at the project level and contribute to stabilisation of the outlooks.

Renewed investor appetite for the sector could help sponsors raise capital to support projects

that are perceived to retain a long-term economic value while facing stress in the short term.

Key Issues

Thermal Power Projects Coal-Based Plants – 2013 Outlook: Negative

India Ratings-rated coal-based projects are exposed to completion, fuel supply and off-take

risks among others. Nearly three-fifths of the rated projects can be bracketed as being

vulnerable to high levels of risk. Absent a strong reversal of the negative headwinds and

significant dose of additional sponsor equity, these projects are under threat of being

downgraded.

Figure 3 Risk Matrix of Thermal Power Projects Risk factor Low risk Medium risk High risk

Percentage of total rated projects 8% 31% 61%

Completion risk Completed projects / significant level of completion achieved and without delays; projects meeting construction milestones, major portion of land in company’s possession; boiler-turbine-generator (BTG) supplied and erected according to timelines; operational project.

Projects nearing completion, but delays exist; land is in place and no major hurdles foreseen in acquiring the residual land; no major construction delays. BTG supplied and erected even though with some delays

Projects delayed significantly, land for main plant area yet to be fully acquired, environmental clearance and other approvals delayed. BTG supplies delayed. projects significantly delayed beyond scheduled commercial operations date; incomplete transmission network

Ramp-up risks Plants have stabilised post commissioning; no major technical issues currently

Technical issues; plant operating at sub-optimal levels but expected to achieve steady state operations before long

Structural technology / design issues; concerns about plant’s ability to achieve input-output parameters; stabilisation and ability to operate at rated capacity could be a prolonged affair.

Sponsor equity No cost overruns foreseen; equity injected according to agreed milestones and debt draw down as per schedule

Slight delays anticipated; marginal sponsor equity required to either bridge the gap between projected cost and actual costs and/or support cash flow deficiencies during initial operations phase. Sponsors have the financial flexibility to fund cost overrun.

Huge cost overruns; Injection of sponsor equity may significantly dent the financial profile of the sponsors.

Figure 2

3%1% 3%

10%14%

35%13%

4% 7%

4% 7%

0 10 20 30 40

D B-

BB- BB

BB+

BBBBBB+

A-AA-

AAA

Rating Distribution


(%)

BBB-



February 2013 3

Fuel supply risk Fuel supply agreement signed for all or most of the requirement; sponsor has the ability to arrange for gap in coal supply if any; full cost pass through arrangement available; in stress scenarios, cash flows are able to withstand increased coal cost.

CIL commitment available to sign FSA for major part of the requirement; fuel cost pass through arrangement available. In the stress case, cash flows can withstand the impact of 30% imported coal; captive coal mine under development. delays observed; risk of de-allocation exists

No formal linkages as yet; exposed to the volatile imported coal market Fuel cost pass through not available (for example, merchant power plants); transportation logistics including domestic railway infrastructure not adequately addressed

Off take risk Power sale fully tied up under ‘take or pay’ arrangements; no or limited exposure to volume or price risks under long-term PPAs

Major portion of power sales through long-term PPAs on a ‘take or pay’ basis; exposure to volatile merchant sales manageable

No formal off-take agreements or PPAs with power traders; full exposure to merchant market; exposed to volume risk and price volatility

Counterparty credit quality

No major delays observed in payment for purchase of power

Some intermittent delays observed in payment for purchase of power by the power utilities; however, project has adequate reserves or liquidity lines to manage cash flow mismatches.

The counterparty has defaulted on the power purchase obligations and protracted delays observed; financial position of the utility considerably impaired


Fuel Supply Constraints Continue to Plague the Sector

Projects tend to rely on one or more of coal linkages (from government owned mines), captive

coal blocks (CCBs) available with or allocated to sponsor group companies and imports to

meet their fuel requirements.

The acute coal shortage facing India and the vigorous efforts made by the government of India

(GoI) to compel the state-owned Coal India Limited (CIL) to sign fuel supply agreements

(FSAs) with power projects have been well documented to bear much repetition here. The

progress has been rather tardy with less than two-fifths of the targeted number of FSAs signed

so far. Even in the cases where FSAs have been signed, impediments such as the lack of

sufficiently harsh penal deterrents for non-fulfilment of supply obligations and the propensity to

offer inferior grade coal to adhere to volume commitments preclude projects from operating at

forecasted plant load factors (PLFs).

The actual production of non-coking coal has been consistently lower than the projected

production. In FY12, domestic coal production recorded a 26% decrease over the XI plan

estimates.

Figure 4

469 511 557 607 662

423 458 488 483 488

7480889090

0

100

200

300

400

500

600

700

FY 08 FY 09 FY 10 FY 11 FY 12

0

20

40

60

80

100

Target (LHS) Actual (LHS) Achievement (RHS)

Actual and Projected Non-Coking Coal Production in XIth Plan

(MT)

Source: Planning Commission, India Ratings

(%)



February 2013 4

Figure 5

278 281 302 330 355 367 387 418

249 257 262 280 296 299 304 312

757981838587

9190

0

100

200

300

400

500

FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12

0

20

40

60

80

100

Coal consumption (LHS) CIL to power sector (LHS) Supply (RHS)

Coal Consumption vs. CIL Supply for Power

(MT)

Source: CEA, Col India and India Ratings

(%)

With more plants nearing completion and widening fuel shortage (an estimated 238m MT by

FY17), India Ratings expects that they will not achieve the PLF levels anticipated in their base

case financial models in the initial periods of operation. The agency has factored into its ratings

a stress scenario involving blending of up to 30% imported coal at market prices. However, the

ability of generators to pass through the higher blended cost of coal to off-takers would be a

key credit driver.

Figure 6

Imported Coal – Increased Volatility

Demand for imported coal has been rising given the consistent shortage of domestic coal for

the power sector.

India Ratings expects the plants that depend wholly on imported coal to bear the brunt in the

form of higher generation costs. This is because most of the plants using imported coal in the

agency’s portfolio do not have cost-pass through arrangements in their respective power

purchase agreements (PPAs). While international prices have cooled off in recent months (see

Appendix), the benefit is somewhat neutralised by the currency depreciation. Due to the

shortage of domestic coal, even those plants having full cost pass through arrangements may

have to blend imported coal and thus will be exposed to fuel price risk. This could force

generators to re-negotiate their off-take agreements.

Captive Coal Blocks: Political Risks

Projects that depend on coal supplies from CCBs have experienced delays due to difficulties

experienced by sponsor groups in operationalising the mines. Delays on account of acquiring

land and obtaining requisite environmental clearances are widely attributed as the primary

reasons, though India Ratings believes that financial constraints and lack of sector expertise

are also responsible to an extent.

None of the agency’s rated power projects have so far been affected by the recent government

5.15 5.72 6.5 7.378.42

4.16 4.36 4.71 5.21 5.50.540.530.510.440.23

2.38

0.76 0.92

1.28

1.63

0

2

4

6

8

10

FY13 FY14 FY15 FY16 FY17

(Hundreds)

0.0

0.5

1.0

1.5

2.0

2.5 (Hundreds)

Coal requirement (LHS)

Expected coal availability from domestic sources (LHS)

Coal requirement of imported coal based projects (LHS) Net shortage to be managed by Coal India Ltd (RHS)

Coal Shortage

(mMT)

Source: NPTI, CEA, India Ratings

(mMT)



February 2013 5

decision to de-allocate CCBs. That being said, these power projects are likely to be affected

because of the delays faced in commencing coal mining at the allocated coal blocks. The threat

of cancellation also looms over these projects in the event of further delays. The generation

cost advantages that such plants could have enjoyed is gradually being eroded by the

continued delays.

Merchant Projects – Higher Power Prices Offset by Fuel Costs

Merchant power prices have been rising - a trend that India Ratings expects to continue during

2013 as well. The continued power deficits in India and the increasing proportion of expensive

imported coal in the fuel mix should help merchant power tariffs stay at elevated levels.

However, this may not automatically translate into an improvement in the credit quality of

projects since many of them suffer from lack of firm fuel supply arrangements. Those that have

been granted fuel linkages may be forced by governmental actions to enter into long-term

PPAs with state utilities through competitive bidding on tariffs, thus eliminating their merchant

status. While it may mean loss of profits for equity holders, such a situation can actually help

stabilise long-term credit risks by eliminating price volatility on the power sold.

Figure 7

7.29

4.434.184.79

5.264.52

4.513.23

2.32

0

1

2

3

4

5

6

7

8

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Nov 12

Merchant Power Rates

Source: CERC, India Ratings

(INR/kwh)

Off-Taker Credit Quality

Poor credit quality of the state government owned power distribution utilities (discoms) is a

rating constraint for several projects. The restructuring package announced by the GoI in 2012

should set the discoms on the long and arduous path of financial repair, reeling as they are

under the twin burden of high debt and accumulated losses. Resumption of bank lending is a

short-term gain. Power tariff revisions in some 20 states over the last 10 months have

succeeded in reducing the gap between revenue and cost of power purchases. But for the

discoms to become stable, creditworthy counterparties in the long term with a structural

improvement in their financial profiles, much more concerted action is required in terms of

sustaining the tariff hikes and securing operational efficiencies.

Completion Risks

Like in previous years, aggressive completion schedules, capacity constraints at equipment

vendors, external bottlenecks (land acquisition and permits) and managerial and skilled labour

shortages continue to hamper timely completion of projects. Delays range from a few months to

even two years in some instances. Technical issues with respect to equipment have resulted in

difficulties in stabilising plant operations post-commissioning, leading to projects not being able

to achieved expected PLF levels in the initial year(s). Performance guarantee provisions in the

equipment supply contracts have not been enforced, resulting in the risk having to be absorbed

at the project level and impairing credit quality.

Biomass Projects – 2013 Outlook: Negative

India Ratings expects fuel prices and plant operating performance to be key drivers for the

credit quality of biomass projects in 2013. Volatility in fuel prices and geographical limitations

on sourcing alternatives have made power projects’ cash flows vulnerable to the whims of local



February 2013 6

suppliers of biomass waste. Given that most PPAs stipulate a fixed tariff, margins have been

severely eroded due to unexpected, galloping fuel costs. Where regulators have been

amenable to revising tariffs, the time lag in effecting the increase has led to cash flow

mismatches, leading to defaults forcing bank debt to be rescheduled.

Considering its fairly recent vintage in India, plant stabilisation issues are impinging on biomass

project completion more than previously considered. Performance issues mainly with boilers

mean that plants are unable to operate at rated capacity and hence fixed costs remain under-

recovered.

Wind Energy Projects – 2013 Outlook: Stable-sto-Negative

The outlook for existing operating wind energy projects is stable based on the strong, long-term

revenue contracts that typically underpin cash flows. India Ratings does not expect that

concerns on reliability of performance warranties, accessibility to O&M services and availability

of spare parts will have a rating negative effect as long as the projects use an established

technology with availability of replacement O&M operators/spare parts and can withstand O&M

cost stresses. However, where the PPA off-taker is a financially weak counterparty, delays for

payments in power purchased will continue to exert pressure on project credit quality.

Toll Roads – 2013 Outlook: Stable to Negative

Construction delays and traffic underperformance will remain the two most important rating

drivers in 2013. India Ratings’ rated projects are evenly distributed across the risk spectrum.

Many projects exhibit stable credit characteristics with drastic rating downgrades averted only

on account of expectation of continued sponsor support to fund cost overruns (even if they are

severe) and/or bridge marginal revenue shortfalls in case of operating assets.

Figure 8 Risk Matrix of Toll Road Projects Risk factor Low risk Medium risk High risk

Percentage of total rated projects 50% 30% 20%

Completion risk No completion risk; achieved significant level of completion and without delays; land and right of way available to complete project on time

Project under construction; reasonably on schedule; bulk of land and right of way available; some delays in achieving final completion cannot be ruled out; provision for partial COD in concession agreements

Projects delayed; milestones not achieved; land and right of way not fully available to achieve completion even after a reasonable time frame post scheduled COD

Sponsor equity Entire sponsor equity injected; project cash flows adequate to service debt without expectation of sponsor support

Significant portion of sponsor equity injected; sponsor has financial resources to fund the incremental requirement; ability to fund project cost overruns, if any.

Significant amount of sponsor support required; sponsor’s credit profile deteriorating

Traffic performance Traffic performing as per India Ratings’ base case expectations; in some cases, marginal underperformance but sponsors capable and willing to inject equity to help project tide over the ramp-up phase

Traffic could be performing below expectations but long- term economic value not materially impaired; sponsor support available to meet cash flow deficiencies in the short to medium term.

Substantial traffic underperformance compared with initial forecasts; unlikely to catch-up even in the medium term; loans may have to rescheduled so that amortisation profile is sculpted to the revised revenue forecasts


Construction Delays

India Ratings expects construction delays to continue in 2013. At least 50% of the highway

projects in the rated portfolio, scheduled for completion in 2013 have already reported three to



February 2013 7

six months delays due to land/right of way not being handed over by the concession grantor.

Road stretches that entail environmental and forest clearances and interface with the railways

are more susceptible to prolonged delays. However, in many projects, these delays would not

necessarily lead to a deterioration in the credit profile because of the influence of one or more

of the following factors: (a) Concession provisions allow partial tolling on completion of 75% of

the project as long as the delay in completion is not attributable to the concessionaire; (b)

Fixed-price, date-certain EPC contracts with reputed contractors (usually a sponsor group

company) and sponsor obligation under the financing documents to fund cost overruns; (c) the

project does not represent major engineering challenges and is well within the capabilities of

the contractor; delays are traced not to performance issues on the part of the contractor but to

bottlenecks in the grantor fulfilling its obligations.

Operating Toll Roads – Revenue Under-Performance

Projects that have commenced tolling from 2012 could have an extended and gradual ramp-up

phase, mirroring the period of slowing economic growth. On average, commercial vehicles tend

to contribute around 75% to vehicular traffic and this segment exhibits a more direct correlation

with GDP growth and so, in the current environment, exerts downward pressure on toll

revenue. The likely pick-up in economic activity should help improve traffic volumes though the

benefit would only accrue gradually. However, in cases where the root cause of traffic under-

performance has been optimistic and aggressive forecasts, mere increase in annual traffic

growth rates alone will not be sufficient to help projects stave off revenue shortfalls and

consequent slippage in credit quality.

Since almost all concessions permit annual inflation-linked toll rate increases, the high inflation

indices help road projects generate higher revenue since most initial models had assumed a

modest 5% yoy increase in inflation rates. However, the extent of revenue benefits from

inflation does not necessarily offset the loss from lower vehicular throughput.

India Ratings has observed that in most cases sponsors seem inclined to inject adhoc

unsecured loans or equity to help projects meet debt service obligations; in some cases,

sponsors have continued the support for more than two years. The agency believes that this

phenomenon can be sustained only by strong sponsors with access to capital and who,

convinced of the long-term economic value of the assets, are prepared to defer equity returns

by hoping to secure them from long tail periods in the concession agreements. In all other

situations, some form of loan restructuring would almost be inevitable.

Availability-Based (Annuity) Road Projects

India Ratings believes that the ratings of availability-based road projects will be stable in 2013.

This is because of lower revenue risks and simpler maintenance requirements considering the

operator-cum-sponsor’s track record in the sector. Availability-based road projects exhibit more

stable credit characteristics and are usually rated higher than other projects even though their

debt service coverage ratios are modest. The assurance of periodic revenue streams from a

highly rated government counterparty lends strength to the ratings.

Risks to the rating could emanate from re-gearing programmes aimed at advancing equity

distributions to sponsors, thereby reducing protection available to lenders. In select projects,

counterparty (particularly some state governments) delays in making available construction

grants could increase demands for sponsor equity and impair the project’s credit profile if the

latter is not forthcoming.

Airports – 2013 Outlook: Stable to Negative

The regulatory clarity that has emerged from the recent orders on project costs and the levy of

airport development fee has provided relief to airport credits. This is because there is now

greater certainty on the sources of funding, thereby alleviating the need for significant



February 2013 8

additional debt. Construction progress in expansion-cum-modernisation programmes has also

been satisfactory and appears to be on course to achieve completion as per the revised

schedule. However, concerns over delays in monetising real estate revenue streams and also

slowing passenger growth in recent months continue to exert pressure on project companies’

credit profile.

Tepid economic conditions globally and slowing economic growth in India coupled with rising

domestic airfares have lowered growth rates in international passenger traffic and led to

negative growth in domestic passenger enplanements. Domestic passenger enplanements fell

by 5% during April-October 2012 as against 19% growth during April-October 2011. Over the

same period, international passenger traffic grew by a modest 2% as against 8% growth. In

private airports, freight traffic declined marginally by 4.9% yoy during April-August 2012. India

Ratings views this fall in passenger enplanements as a cyclical trend and given the strong base

– thanks to the robust growth recorded over the last six-seven years – it is unlikely that long-

term forecasts would not be achieved.

Timely project completion without any further cost overruns and ability to realise plans on non-

aeronautical revenue sources, real estate in particular, would be an important rating driver in

2013.

Figure 9

02468

101214

Jan 0

7

Apr

07

Jul 07

Oct 07

Jan 0

8

Apr

08

Jul 08

Oct 08

Jan 0

9

Apr

09

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Jan 1

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10

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Oct 10

Jan 1

1

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11

Jul 11

Oct 11

Jan 1

2

Apr

12

Jul 12

Oct 12

International Domestic

Passenger EnplanementsJan 2007 to Oct 2012

Source: Airports Authority of India

(Passengers per month, m)

Figure 10

0

40

80

120

160

Jan 0

7

Apr

07

Jul 07

Oct 07

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8

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Freight VolumesJan 2007 to Oct 2012


(Ton per month, 000s)



February 2013 9

Figure 11

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120

Jan 0

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Apr

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Jul 07

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Oct 12


Aircraft Movements Jan 2007 to Oct 2012


(Aircrafts per month, 000s)

Minor Seaports – 2013 Outlook: Stable to Negative Outlook

Existing operating minor seaports are better placed to absorb the threat of a volatile global

economic environment than major sea ports, particularly those with a higher proportion of long-

term take or pay contracts in their revenue profile and a diversified cargo mix. India Ratings

would expect such assets to maintain stable credit characteristics more so if they have also

completed capex programmes or alternatively have the flexibility to defer them.

Conversely, greenfield ports still in the ramp-up phase could be more severely impacted due to

reduced commodity throughput. Negative rating action may be warranted for the ports that face

concentration risk (e.g., dependence on imported coal for power plants under construction that

could be facing delays) and lack of long-term off-take contracts and have weak financial

structures.

What to Look for in 2013

In monitoring its portfolio of rated projects as also assessing the overall credit quality of the

sector in 2013, India Ratings will pay particular attention to the following factors.

Ability to Address Completion Risk

For road projects, this would entail securing the requisite land/right of way in a timely manner

along with environmental and forest clearances where applicable. Even if these are not fully

forthcoming, the willingness of the concession grantor to permit projects to declare provisional

COD and commence tolling would be the key. Equally important for projects that are deemed

partially completed would be for lenders to effect pro-rata reduction in the principal amortisation

to reflect lower debt draw down; else, projects could be faced with situations where cash flows

from toll operations do not fully cover debt service payments given that initial base case

structures had very thin coverage ratios.

Coal-based thermal power projects will need to overcome difficulties in securing residual land

for completing construction of plants, building supporting railway infrastructure as well as

operationalising captive coal mines, where allotted. The latter would also need to secure

relevant environmental permits.

While the Cabinet Committee on Investments and the proposed introduction of the Land

Acquisition Bill should, in many situations, help in addressing the aforesaid bottlenecks, the

agency does not believe that the short-to-medium term results or impact would be dramatic.

Interest Rate Reduction

If the widely anticipated interest rate cuts are effected by the RBI in 2013, the speed and

extent to which the benefits are transmitted by lenders will determine cash flow benefits that

individual projects could likely gain. India Ratings believes that even a 100bps cut during the

Figure 12

Sponsor

support

30%

Project

cashflow

70%

Debt Service




February 2013 10

year will not be adequate to fully retrace the large quantum (200bps-450bps) of interest rate

increases that projects have been suffered in the last three-four years.

Sponsor Equity

As projects reel under the impact of multiple risks, the ability and willingness – in several

situations the expectation is non-contractual – of sponsors to extend support will be critical in

averting rating downgrades or reducing the magnitude. Investor aversion to the sector has

made the task of raising fresh equity capital very difficult. Asymmetry in valuation expectations

has meant that sponsors’ attempts at disposing off poorly performing assets have not

succeeded. Sponsors, many of whom are construction companies, have seen their financial

profiles deteriorate, thereby reducing their appetite for supporting weak BOT projects.

Operating Performance

In 2012, 50% of the rated projects needed injection of sponsor support to bridge deficiency in

cash flows available for debt service. On an aggregate basis, about 30% of debt service

payments were made out of sponsor loans with only 70% coming from project revenue.

In 2013, operating toll road projects could benefit from higher volume growth rates on the back

of a pick up in economic activity. However, this may not offer significant relief to those projects

that have had material under-performance in the initial year(s) or an extended traffic ramp-up

phase.

Operating performance of power projects will be driven by their success in: (a) achieving plant

stabilization quickly post-commissioning and (b) resolving fuel supply constraints. Assuming

plants are able to operate at full capacity, utilities’ behaviour in fulfilling their purchase

obligations under the PPAs will drive credit quality.

Funding Issues

Existing projects, except those suffering extra-ordinary cost overruns, should be relatively

insulated from funding constraints plaguing the sector. However, new projects seeking financial

closure are likely to face considerable pressure as the trend witnessed last year is expected to

continue in 2013 as well. Bank funding for green-field projects for building thermal power

generation capacities has virtually dried up. Only a select few toll road projects have

succeeded in achieving financial closure and the underwriting process has taken much longer

than was the case until 2011. Media reports suggest that nearly three-fourths of road projects

awarded by the National Highways Authority of India (NHAI) in YTD FY13 have yet to achieve

financial closure.

Extreme caution and risk aversion seem to be guiding the actions of lenders and while recent

government initiatives have kindled hopes of confidence being restored, 2013 is unlikely to see

a dramatic reversal of sentiment. In any case, the days of easy and cheap availability of

abundant bank credit for funding all manner of new projects may well and truly be over.

Funding challenges and woes afflicting several developers are combining to slow down new

project activity. As an illustration, the charts below show a flattening out in terms of NHAI’s

success rate in awarding projects, measured in kilometer length, and awarded projects being

completed. The latter metric is also a manifestation of the completion delays described earlier.

Recent anecdotal evidence suggests that only about a sixth or so of the FY13 target is likely to

be accomplished, forcing NHAI to switch from the BOT model to the EPC mode of awarding

contracts to attract wider developer interest.

India Ratings believes that 2013 could witness bond market issuances from strong operating

projects. Falling interest rates, IIFCL’s partial guarantee product aimed at credit enhancement

and the launch of infrastructure debt funds can all act as catalysts. Should this materialise to

potential, sizeable bank finance could be freed up for being channelised into financing new

project construction. Sponsors would also be exploring options to refinance operating projects



February 2013 11

in their portfolio with the intention of advancing equity returns; projects with longer ‘tails’ would

be attractive candidates for regearing transactions.

Figure 13

4,4405,738

10,641 9,806 9,000 7,994

1,219 3,3685,083 4,6881,730

643

58.6456.48

34.34

6.0421.24

38.95

0

2,000

4,000

6,000

8,000

10,000

12,000

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (end

February)

0

20

40

60

80

Target (LHS) Achievement (LHS) Achievement (RHS)

Target Achieved (Projects Awarded)

(KM)

Source: NHAI, India Ratings

(%)

Figure 14

3,4592,885

3,519 3,1652,500 2,500

1,685

2,6941,784 1,863636

2,203

74.5371.36

85.1362.6

58.39

18.38

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (end

February)

0

20

40

60

80

100

Target (LHS) Achievement (LHS) Achievement (RHS)

Target Achieved (Projects Completed)

(KM)

Source: NHAI, India Ratings

(%)

2012 Review

India Ratings’ rating actions for monitored infrastructure projects in 2012 were dominated by

affirmations (73%), although downgrades (25%) continued to outpace upgrades (2%),

consistent with 2011. Most of the downgrades were on coal-based thermal power projects.

Remaining downgrades were due to project-specific performance and cost issues. 6% of

ratings were downgraded to ‘IND D’ as projects delayed/defaulted on making principal and/or

interest payments as per amortisation schedule.

Construction delays, equity sourcing constraints, revenue underperformance in operating

projects were the primary reasons for the downgrades and outlook revisions. A greater

proportion of negative rating actions were avoided thanks to sponsor support that had helped

some operating projects make timely debt service payments, although the support was non-

contractual in nature.



February 2013 12

Appendix

Figure 15 Figure 16

Figure 17

0

30

60

90

120

150

180

2006 2007 2008 2009 2010 2011 2012

SA avg SA high

South African Coal PricesHigh and average

Source: World Bank, India Ratings

(USD/ton)



February 2013 13

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