(The following was released by the rating agency)
May 19 (Fitch) Fitch Ratings has assigned India’s MEP Toll Road Private Limited’s (MEPL) INR327.2m bank loans a National Long-Term rating of ‘BBB-(ind)’ and its INR1,750m bank guarantee facility a rating of ‘BB(ind)’. The Outlooks are Stable.
MEPL is a subsidiary of Ideal Toll and Infrastructure Private Limited (ITIPL). It was established as a special purpose vehicle (SPV) on 8 August 2002 to undertake toll collections at five entry points to Mumbai for a period of 156 weeks (six years). In 2010, the toll collection rights were transferred to MEP Infrastructure Private Limited, a subsidiary of MEPL, for a period of 16 years on the payment of an upfront fee of INR21,000m. MEPL currently holds 22 concessions: 17 from National Highways Authority of India (NHAI, ‘AAA(ind)’/Stable), four from Maharashtra State Roads Development Corporation limited (MSRDC) and one from the Road Infrastructure Development Company of Rajasthan (RIDCOR), in exchange for fixed weekly payments to the concession granting authority during the concession period. MEPL continues to bid for toll collection rights on various NHAI and State Highways Authority concessions.
As described more fully below, for each concession, MEPL takes the revenue risk while paying NHAI a fixed weekly amount in exchange for the right to collect tolls. MEPL must provide an upfront cash deposit and a bank guarantee, each equal to four weeks worth of fixed payments to the grantor - together serving as performance security for c. two months of fixed payments. This performance security is retained by NHAI with no interest payable for the duration of the concession, following which it is released back to MEPL. For 12 of the 17 NHAI concessions, the cash portion of the performance security has been funded by the INR327.2m bank loan; for the remaining 10 concessions, it has been funded out of internal accruals, which could later be replaced by debt. The bank guarantee has been drawn for all 22 concessions from two banks which have sanctioned limits of INR1,750m collectively, of which INR560m has been drawn so far.
MEPL’s bank loan ratings have many of the features of a project finance structure. Revenues from 12 NHAI concessions are deposited directly into an escrow account, from which fixed weekly payments are made to NHAI as part of the prescribed cash waterfall. There is a minimum interest cover ratio covenant of 1.40x and a three-month debt service reserve account. Interest on the bank loan is payable monthly at an annual rate of 10.2% and principal repayment is set to take place immediately upon NHAI releasing the performance security. A six-month cushion has been built in to allow for some delays so that the final repayment date is 18 months from the date of drawdown. As per Fitch’s analysis, MEPL’s revenues are adequate to service interest payments (ICR c.3.8x), thus leaving some surplus and not requiring the grantor to draw on the performance security - which would in turn allow the unimpaired repayment of the principal.
The bank guarantee does not have the same features, which is reflected in its ‘BB’ rating. Limits of INR1,750m have been sanctioned to enable MEPL to continue bidding for additional concessions. While Fitch has analysed the projected revenues and costs of nine of the additional concessions (five from NHAI, four from MSRDC), most of these roads have recently been handed over to MEPL, so track record of revenues is relatively limited. Furthermore, as long as MEPL continues to bid for new concessions, future rating actions will depend on the revenue capacities of the new roads.
For both the bank loan and the guarantee, MEPL benefits from the diversification of revenue risk across various geographies within India (the concessions are spread over seven states) and from the resulting cross-collateralisation, where revenues from one concession can go towards the payment of fixed obligations of another, expect for the 12 NHAI bank-loan concessions that cannot cross-collateralise the others. However, it should be noted thatalthough the roads are all operating toll roads, data available to Fitch including internal traffic counts carried out by MEPL has a limited time scope and therefore estimates of future revenue could be subject to intra-month and seasonal variations. This results in additional uncertainty regarding MEPL’s performance and the same is reflected in the ratings.