Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AAA/Stable’ rating on the bank facilities of Bharat Highways InvIT (Bharat InvIT), an infrastructure investment trust of roads sector assets sponsored by G R Infraprojects Limited (GRIL, or Sponsor; rated CRISIL AA /stable/A1+) with GR Highways Investment Manager Pvt. Ltd. as its Investment Manager, GRIL as the Project Manager and IDBI Trusteeship Services Limited as the trustee.

 

The rating reflects strong and diversified portfolio of hybrid annuity road assets[1] proposed to be transferred to the trust by the Sponsor. The portfolio has healthy revenue visibility, supported by operational track record of receiving at least 2 annuities from strong counterparty National Highways Authority of India (NHAI, rated ‘CRISIL AAA/Stable) for all underlying assets except one which received PCOD on 2nd August 2022. It also reflects fixed price Operations & Maintenance (O&M) and Major Maintenance (MM) contract with GRIL. These, coupled with adequate leverage, will result in strong debt protection metrics. As a large part of debt is proposed to be at Bharat InvIT, the debt servicing ability will be strengthened by cash flow pooling from all the projects. As per the proposed terms, the debt is expected to be capped at 49% of the trust’s valuation till the first six distributions which can be subsequently increased to 70% subject to compliance with InvIT regulations. The initial portfolio is estimated to have leverage comfortably below 49% at 40-45%. Additionally, terms in the proposed financing documents stipulate maintenance of Debt Service Reserve Account (DSRA) equivalent to one quarter debt servicing, providing liquidity cushion. The rating also derives strength from the experience of GRIL in managing and maintaining road assets.

 

These strengths are partially offset by susceptibility of volatility in interest rates and debt service coverage ratio (DSCR) susceptible to future acquisitions.

 

[1] The trust will have an initial portfolio of 7 HAM assets

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Bharat InvIT with its underlying Special Purpose Vehicles (SPVs). This is because the trust is expected to have direct control over these SPVs. The entire proposed debt is expected to be taken at the InvIT level. The debt along with the fresh equity infusion will then be lent to the proposed SPVs as shareholder loans, which will be utilised towards retiring existing external debt apart from Rs. ~800 crore of NCD which will continue till September 2024. The debt at InvIT level will be serviced from cash flows up-streamed from the underlying SPVs. The DSCR testing for the restricted payment conditions (RPCs) would be at the Bharat InvIT level. Also, as per the financing terms, the cap on borrowings has been defined at a consolidated level; aggregate consolidated borrowing for the InvIT and its SPVs is restricted at 49% of the valuation till the first six distributions which can be subsequently increased to 70% subject to compliance with InvIT regulations. 

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Healthy operational track record of assets with strong counterparty: The portfolio comprises of 7 hybrid annuity model (HAM) assets, of which 6 are operational while GDDHPL received its PCOD on 2nd August 2022. These assets have an operational track record of around 0-2.5 years and are located across Gujarat (27%), Uttar Pradesh (25%), Maharashtra (18%), Andhra Pradesh (17%) and Punjab (13%) which provides benefit of geographical diversification. Additionally, no HAM assets in contributing more than 25% to the total annuity of the InvIT and the balance concession period for the 7 assets range from 12.5 to 15 years which will provide long term cash inflows to the InvIT.

 

The counterparty of all the assets is National Highway Authority of India (NHAI; CRISIL AAA/Stable) and the outlook on NHAI reflects the outlook on the sovereign which reduces the counterparty risk. Additionally, due to the inherit benefits of HAM projects, the traffic risk has been assumed by NHAI providing stability and predictability in cash flows.

 

GR Phagwara has a track record of 5 annuities till date, while Porbandar Dwarka has received 4 annuities and Varanasi Sangam have received 3 annuities. GR Akkalkot Solapur, GR Sangli Solapur and GR Gundugolanu Devarapalli have received 2 annuities each and GR Dwarka Devariya is received PCOD on 2nd August 2022 with current ROW of 94.23% and physical progress of 90.12% as per IE report as on 30th September, 2022. The annuity payments from the six HAM assets have been received without any substantial delay or material deduction. All projects have a debt-annuity ratio ranging 50-70% making these assets less leveraged and hence less prone to impediment in debt repayment.

 

Strong debt protection metrics: Financial risk profile is expected to be healthy, supported by comfortable average DSCR of 2 times throughout the tenure of the debt. This is on account of fixed annuity payments and moderate leverage of Rs 2,700 crore expected at the trust level. As a large part of the debt is expected to be at the trust level, debt servicing will be supported by cash flow pooling of all projects under the InvIT structure. Due to the fixed nature of the annuities and a strong counterparty i.e. NHAI, all cash inflows i.e. the annuity payment from NHAI, interest on remaining annuity and inflation adjusted O&M payment from NHAI to the InvIT are expected in a timely manner which will provide safety in debt repayment.

 

The total debt as on August 31, 2022 in the 7 HAM is Rs. 3,822 crore (Rs. 2575 crore as rupee term loan and Rs. 1,248 crore as NCD). Further Rs. ~200 crore is expected to be drawn in the GR Dwarka Devariya SPV, hence the total debt is expected to reach Rs. ~4,000 crore. The InvIT plans to refinance Rs. ~1,900 crore of debt at a lower interest rate and raise Rs. ~1,400 crore as fresh issuance from the market to prepay debt amounting to Rs. ~1,300 crore. This will result in the InvIT with Rs. ~2,700 crore of debt outstanding (Rs. ~1900 crore of term loan at the InvIT level and Rs. ~800 crore of NCD at the SPV level) post listing of the InvIT. InvIT plans to refinance the NCD worth Rs. ~800 crore in fiscal 2025. A liquidity cushion is also built into the proposed debt terms in the form of one quarter DSRA.

 

As per the InvIT guidelines, debt must not exceed 49% of the asset value (until six consecutive dividend distributions) which is also built into the draft term sheet. The initial portfolio is estimated to have leverage comfortably below 49% at 40-45%. CRISIL Ratings believes that the DSCR for the rated debt instruments is strong and is expected to remain well above the covenants throughout the debt tenure, supported by fixed annuity payments and moderate leverage.

 

Experienced management team: Bharat InvIT will benefit from the strong asset management ability of the Sponsor, GRIL, which in turn has extensive experience in the infrastructure space. It is engaged in integrated road EPC with an experience of over 25 years in design and construction of various road/highway projects across 16 states in India and more than 100 road construction projects executed since 2006. Apart from EPC projects, GRIL has a portfolio of 23 road projects. Out of these, 8 are operational, 7 are under-construction and Appointed Date is awaited for the balance 8 projects. In addition to these road projects, GRIL also has 1 under-construction transmission project. Order book of GRIL as on 30th June 2022 stood at ~ Rs. 17,005 crore of which around 92% of the orders belongs to NHAI.

 

Fixed-price Long-Term O&M Agreement Provides Support: Till date in all the 6 operational SPVs, O&M payments have come from NHAI without any major deductions. Furthermore O&M expenses are inflation adjusted with 70% weight to WPI & 30% weight to CPI providing cushion and reducing overall variability in O&M payments. The HAM asset that are proposed to be acquired will also execute fixed price O&M and major maintenance contract with GRIL for the entire concession period with a clause of fixed price for the first seven years post which the price will be mutually renegotiated. The fixed-price contract provides the first level of cushion in terms of stability of cash flows. Any increase in O&M higher than stipulated in agreement will be borne by GRIL resulting in lower volatility in cash flows of the InvIT.

 

However, actual O&M for its operational assets have been between 3.3 lakh/km to 14.2 lakh/km which are lower than CRISIL estimates.  Therefore, if the maintenance costs are lower than expected after 7 years, the costs can be revised downwards, further supporting the cashflows of the InvIT.

 

The O&M and MM agreement will cover the entire concession period with a clause of fixed price for the first seven years and then price will be mutually renegotiated. Any change in this arrangement and higher than expected O&M costs in actual agreement will be key monitorable

 

Weakness:

Susceptibility to volatility in interest rates and possibility of debt funded acquisitions: Any reduction in the bank rate, which may be witnessed can impact the DSCR given that a large proportion of the cash inflow is from the interest on balance annuities. Furthermore, as operation cost depends on inflation and the proposed rupee term debt has a floating interest rate, with monthly reset linked to benchmark, any significant increase in these components could impact cash flow. Although coverage indicators will be safeguarded to a certain degree due to a natural hedge as the movement in interest rate on borrowings which are linked to external benchmark and the interest on annuities which are linked to Bank Rate shall move in the same direction.

 

Further the management also envisages to add additional operational HAM assets in the InvIT, however management’s philosophy is to acquire only operational HAM assets backed by NHAI in InvIT which will provide stable returns. But any acquisition of under construction assets or acquisition of weak assets with high debt and low revenue potential or leveraged acquisition of operational HAM assets impacting DSCR on sustained basis will remain a rating sensitivity factor.

Liquidity: Superior

Expected timely annuity receipts of Rs. 6,500 crore over the next 15 years will be adequate to meet operational expenses and debt obligation. Average DSCR is expected to be comfortable at 2 times and cushion in annuity receipts is provided by a strong counterparty with no substantial delay in annuities for any of the operational assets. Furthermore, a DSRA equivalent to three months’ interest and principal obligation will be maintained. Liquidity will also be supported by dividend flow from the SPVs to the InvIT over the course of 15 years.

Outlook: Stable

CRISIL Ratings believes Bharat Highways InvIT will continue to benefit from the healthy steady revenue from the 6 operational HAM assets and the expected PCOD receipt of one asset, backed by strong counterparty and predictable expense and mitigants to O&M and MMR related risks.

Rating Sensitivity factors

Downward factors

• Substantial delay in receipt of annuity, considerable deduction in annuities and O&M payments in any asset
• Higher-than-expected incremental borrowings or acquisition of weak assets with high debt and low revenue potential impacting average DSCR
• Non-adherence to the structural features of the transaction
• Non maintenance of adequate liquidity reserves in the form of DSRA
• Any adverse changes in regulation or significant deterioration in credit profile of counterparty

.

 

About the InvIT

Bharat Highways InvIT is an infrastructure investment trust of roads sector assets sponsored by G R Infraprojects Limited (GRIL, or sponsor; rated CRISIL AA /stable/A1+) with GR Highways Investment Manager Pvt. Ltd. as its Investment Manager, GRIL as the project manager and IDBI Trusteeship Services Limited as the trustee.

 

The InvIT has received registration certificate from SEBI as an infrastructure investment trust on 3rd Aug 2022 and proposes to acquire 100% of the shareholding of the Sponsor in 7 Project SPVs namely GR Phagwara Expressway Limited (“GPEL”), Porbandar Dwarka Expressway Private Limited (“PDEPL”), GR Gundugolanu Devarapalli Highway Private Limited (“GDHPL”), GR Akkalkot Solapur Highway Private Limited (“GASHPL”), Varanasi Sangam Expressway Private Limited (“VSEPL”), GR Sangli Solapur Highway Private Limited (“GSSHPL”) and GR Dwarka Devariya Highway Private Limited (“GDDHPL”).

 

Subject to the receipt of requisite approvals, the InvIT intends to acquire 100.00% of the equity shares in each of the Project SPVs (except GDDHPL) from the sponsor and 49% in GDDHPL. As consideration for the acquisition of the equity shares of the Project SPVs, the InvIT will issue units to the sponsor on the Acquisition Date pursuant to the Share Purchase Agreements.

 

As of 31st Aug 2022, Project SPVs had total outstanding external borrowing of Rs. 3,830 Crs. The InvIT proposes to utilize an aggregate amount of Rs. 1900 Crs from the Facilities proposed to be raised towards repayment/ pre-payment of certain outstanding loans of Project SPVs including any interest accrued and prepayment penalty thereon. The InvIT also plans to raise fresh capital of Rs ~1300 post which the shareholding of GRIL will come down to ~60%.

Any other information: 

CRISIL Ratings has received an undertaking from Bharat InvIT stating that key details (assets, location, capital structure, aggregate leverage and other key assumptions) of the initial portfolio of the 7 assets are in consonance with the details that will be submitted to SEBI.

 

Key terms of proposed debt

Facilities	Facility 1: Rupee Term Loan (“RTL”) Facility of upto Rs. 1900 Crs Facility 2: Rupee Term Loan Facility of upto Rs. 300 Crs Facility 3: Rupee Term Loan Facility of upto Rs. 800 Crs
Purpose	Facility 1: The proceeds shall be used towards refinance of the existing debt of Project SPVs. Facility 2: The proceeds shall be used towards acquisition of balance equity stake and payment of unsecured loan of Sponsor in GDDHPL. Facility 3: The proceeds shall be used towards refinance of the existing Debentures availed by Project SPVs.
Tenure	Facility 1: Door to Door tenor of 13.5 years from date of disbursement Facility 2: Door to Door tenor of 13.0 years from date of disbursement Facility 3: Door to Door tenor of 12.3 years from date of disbursement
Financial covenants	Annual minimum DSCR of 1.10 times, Debt-to-enterprise value (EV) < 49% till the first six distributions which can be subsequently increased to 70% subject to compliance with InvIT regulations.
DSRA	Equivalent to one quarter interest and principal obligations for the proposed debt maintained at the InvIT level