Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long-term bank facilities and non-convertible debentures (NCDs) of Rs 1,370 crore of Highways Infrastructure Trust (HIT). Also, ‘CRISIL A1+’ rating on commercial paper (CP) of Rs 275 crore has been reaffirmed.

 

CRISIL Ratings’ notes the recent announcement, on January 15, 2024, by HIT to acquire 12 road special purpose vehicles (SPVs) owned by PNC Infratech Limited and PNC Infra Holdings Limited (collectively ‘PNC’).

 

HIT has signed a share purchase agreement (SPA) for acquisition of 100% shareholding in 11 hybrid annuity model (HAM) SPVs and a toll SPV at an enterprise value of around Rs 9,006 crore (inclusive of any conditional earnout and subject to adjustments in accordance with the terms of the SPA), subject to certain regulatory and customary conditions and receipt of relevant approvals from regulators, lenders and other corporate authorities. The target portfolio comprises road projects with around 3,800 lane km across the states of Rajasthan, Uttar Pradesh, Madhya Pradesh and Karnataka. The HAM projects have concessions from National Highways Authority of India (NHAI, rated ‘CRISIL AAA/Stable), while the toll project has concession from Uttar Pradesh State Highways Authority (UPSHA). While 10 projects are currently operational out of the 12 projects, the balance 2 projects are under-construction which will be acquired post commencement of operations.

 

The transaction is expected to be completed in fiscal 2025 and will be financed by a mix of debt and equity. Upon acquisition of the proposed assets, the debt-to-enterprise value (EV) of HIT is expected to be around 55%. HIT’s debt protection metrics are expected to remain comfortable after factoring in the incremental debt. CRISIL Ratings will continue to engage with HIT’s management to get further details of the proposed transaction.

 

The ratings continue to reflect favourable location and geographic diversity of the existing stretches and the stretches to be acquired, and healthy revenue visibility given strong track record of toll collection and annuity receipt. The rating also factors in strong debt protection metrics, supported by tight escrow mechanism with a well-defined payment waterfall mechanism and creation of a debt service reserve account (DSRA) and a major maintenance reserve account (MMRA). The rating also derives strength from the experience of Kohlberg Kravis Roberts & Co. LP and/or its affiliates (collectively ‘KKR’) and services provided by Highway Concessions One Pvt. Ltd (HC1) and HC One Project Manager Pvt. Ltd (HC1 PM) to the assets.

 

These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume, development or improvement of alternative routes or modes of transportation that could impact revenue and in turn debt service coverage ratio (DSCR). The DSCR will also remain susceptible to volatility in operations and maintenance (O&M) costs and interest rates. Going forward, philosophy of debt funding and its impact on leverage of the trust will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of HIT with its underlying SPVs. This is because the trust is expected to have direct control over these SPVs and will infuse funds in them (in the form of shareholder debt) to prepay outstanding debt. Furthermore, the SPVs will distribute their surplus cash to the infrastructure investment trust (InvIT), in the form of interest and repayment (on debt provided by the InvIT/debentures), dividend or return of capital through capital reduction, leading to highly fungible cash flows. Also, as per the financing terms, the cap on borrowings has been defined at a consolidated level.

 

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 geographic diversification

The existing portfolio comprising of ten SPVs (excluding project SPVs to be acquired) in different states benefits from asset and geographical diversification. Additionally, the projects have strong counter parties – NHAI for 8 project SPVs and Ministry of Road Transport and Highways and Madhya Pradesh Road Development Corporation Ltd for the remaining two. The toll road projects have long tolling track record ranging from 8 to 22 years, while the annuity projects have track record of receiving 28 and 21 semi-annual annuities without any material deduction. All three  HAM projects have achieved commercial operations date (COD) and received 3-4 annuity payments. The portfolio will further benefit from diversification after the proposed acquisitions of four toll and twelve HAM assets.

 

The toll stretches are situated along major industrial and tourist hubs and connect important cities such as Godhra, Jodhpur, Indore, Bhopal, Ahmedabad and Chennai to major ports on the western (Kandla and Mundra) and eastern (Chennai, Puducherry and Krishnapatnam) seaboards. The stretches are spread across seven key states (presence in nine states including proposed acquisitions) that contribute substantially to the total gross state domestic product. HIT will, thus, benefit from healthy traffic potential. Balance concession period of the projects ranges from 3 to 20 years. While the concession for three of the six initial stretches is expected to be over in next 3-4 years, their contribution to the initial portfolio was expected to be 35-40%. Hence, long term revenue visibility is driven by other three assets having larger share of revenue in the initial portfolio of 6 assets. Furthermore, the trust is in the process of acquiring new assets and will continue to look for new opportunities of adding assets and hence, further diversifying the portfolio over the medium term.

 

Three of the existing five toll projects have an annual toll rate escalation with a fixed increase of 3% and a variable portion equal to only 40% change in the wholesale price index (WPI), limiting dependence on WPI, thereby supporting revenue, while one project has a fixed toll rate hike of 7% and the remaining one is linked directly to the WPI. For the proposed acquisitions, while toll escalation rates are linked to WPI for Bangalore Elevated Tollway Pvt. Ltd (BETPL) and Swarna Tollway Pvt Ltd (STPL; ‘CRISIL AAA/Stable’) and it is linked to the consumer price index (CPI) for Gujarat Road and Infrastructure Co Ltd (GRICL) and 3% plus 40% change in WPI for PNC toll asset.

 

Toll revenue for the initial portfolio of 4 assets grew by ~24% in fiscal 2023 to Rs 564 crore driven by traffic growth of 7-18% in fiscal 2023, across stretches. Traffic and toll collection is expected to remain healthy going forward as well.

 

Strong debt protection metrics, with provision for cash sweep and creation of DSRA and MMRA

Financial risk profile is healthy with existing outstanding debt of ~Rs 3,515 crore at InvIT level as on date. HIT is expected to raise incremental debt of ~Rs 1,024 crore at the time of acquisition of one HAM project (received provisional COD recently) of H.G. Infra Engineers Ltd (H.G. Infra), BETPL, STPL and GRICL along with additional investment from unitholders. The resultant average DSCR is expected to remain strong with cash flows remaining sufficient to service incremental debt as well as premium payments.

 

The terms for existing debt also require adequate liquidity cushion in form of three months DSRA and six months MMRA. As per existing terms, cash trap will be triggered if DSCR falls below 1.40 times, while there will be a cash sweep in case of negative impact on tollable traffic on account of an alternate route to the project roads. The structure also stipulates that any transfer to the distribution account will be made only post meeting debt obligation, DSRA and MMRA requirement, and transfer to the cash sweep account, if required. Furthermore, as per the terms of Rupee Term Loan 1, the debt is capped at 49% of the trust’s valuation.

 

While the covenants for DSCR and leverage are to be relaxed in the new debt, DSCR for the rated debt instruments is expected to remain comfortable and well above the covenants throughout the debt tenure, supported by healthy toll collection and moderate leverage. Hence, CRISIL Ratings believes that relaxation in financial covenants will not have a material impact on HIT’s credit risk profile. However, increase in debt from current levels, in the absence of commensurate cash inflows, will remain a key rating sensitivity factor.

 

The existing NCDs have a tenor of three years 3 months and 7 years for tranche-1 and tranche-2, respectively, exposing the trust to refinancing risk. Nevertheless, the risk is mitigated by a long tail at the end of tenure of NCDs, ability and track record of the sponsors in refinancing, and healthy revenue potential of the road stretches.

 

Experienced management team

HIT will benefit from the strong asset management ability of Galaxy Investments II Pte. Ltd, (the Sponsor or Galaxy), which is affiliated with funds, vehicles and/or entities managed and/or advised by affiliates of KKR, which in turn has strong experience in the infrastructure space, including in India. While this is Galaxy’s first investment in Indian roads, it benefits from KKR’s experience in renewable energy and transmission sector in India. Additionally, the assets will be managed by experienced service providers HC1 and HC1 PM, who have a long track of managing these assets.

 

Weaknesses:

Susceptibility of toll revenue to volatility in traffic, or development or improvement of alternative routes

Toll collection is a major source of revenue and is susceptible to volatility because of toll leakages, competing routes, lack of timely increase in toll rates, fluctuation in WPI-linked inflation, seasonal variations in vehicular traffic, and economic downturns. For instance, traffic and toll collection across stretches was affected due to government policies like demonetisation in fiscal 2017 and the nation-wide lockdown following the Covid-19 pandemic in fiscal 2021 and 2022.

 

While the stretches do not face any substantial threat from alternate routes as of now, improvement of these routes or development of new alternate routes may affect traffic and diversion, if any, on account of any of these will be a key rating sensitivity factor.

 

Susceptibility to volatility in O&M and major maintenance costs and interest rates

The trust is exposed to risks related to maintenance of the projects in the underlying SPVs as per the specifications and within the budgeted costs. While the SPVs are expected to maintain six months equivalent MMRA, any significant dip in toll collection or unplanned maintenance activity could result in cash flow shortfall during years of such maintenance and will remain a rating sensitive factor.

 

The interest rate for the rupee term debt shall be floating with an annual reset linked to benchmark. This exposes the trust to volatility in interest rates. Although part of the debt raised through bonds has fixed rate the cushion in the cash flow, will partially help to absorb the impact of any fluctuations in rate of interest, but it will remain a rating sensitivity factor.

Liquidity: Superior

Toll collection and annuity receipts will be adequate to meet operational expenses and debt obligation of Rs 45-100 crore (including proposed debt) per annum over the three fiscals through 2026. Furthermore, DSRA equivalent to interest and principal obligations of three months will be maintained along with MMRA equivalent to six months of major maintenance expenses. The limited amortising structure of the NCDs with substantial bullet repayments in fiscals 2026 and 2030 exposes the trust to refinancing risk. However, the risk is mitigated by the long tail at the end of the tenure of the NCDs, the ability and track record of the sponsors in refinancing, and healthy revenue potential of the road stretches. HIT had cash and equivalent of ~Rs 251 crore as on September 30, 2023.

Outlook: Stable

CRISIL Ratings believes that HIT will continue to generate healthy toll revenue over the medium term, backed by good traffic potential on the project stretches.

Rating Sensitivity Factors

Downward Factors:

• Lower-than-expected toll revenue by more than 10% on sustained basis or higher-than-expected maintenance cost affecting DSCR
• Higher-than-expected incremental borrowings significantly impacting the coverage metrics
• Non-adherence to the structural features of the transaction or non-maintenance of adequate liquidity reserves in the form of DSRA and MMRA
• Acquisition of weak assets with high debt and low revenue potential impacting overall DSCR

About HIT

HIT is registered as an irrevocable trust under Indian Trust Act, 1882, and as an InvIT under the Securities and Exchange Board of India’s, InvIT Regulations, 2014 since December 23, 2021.

 

HIT is an InvIT of road sector assets sponsored by Galaxy, which is invested in by funds, vehicles and/or entities managed and/or advised by KKR, with HC1 as its investment manager, HC1 PM, a 100% subsidiary of HC1, acting as project manager and Axis Trustee Services Ltd acting as trustee. KKR is a leading global investment firm with approximately US$ 519 billion of assets under management as of June 30, 2023. HIT has a portfolio of ten operational road projects — five toll, two annuity and three HAM.

 

The broad details of the assets held by HIT, are provided below:

 

Jodhpur Pali Expressway Pvt. Ltd (JPEPL)

The 71.5 km stretch is the shortest route connecting Jodhpur to Pali. It achieved PCOD in fiscal 2015 and COD in fiscal 2018 and has a track record of more than eight years with balance concession life of around 21 years. Traffic registered compound annual growth rate (CAGR) of 3.0% between fiscals 2015 and 2023. The stretch has four alternative routes, but these are either two lane or longer than JPEPL’s stretch and do not impact the traffic movement on the project road.

 

Godhra Expressways Pvt. Ltd (GEPL)

The 87.1 km stretch provides connectivity for traffic plying from the Kandla and Mundra ports and moving towards central and east India. It achieved PCOD in fiscal 2014 and COD in fiscal 2017 and has a track record of over nine years with balance concession life of around 20 years. Traffic registered a CAGR of 9.1% between fiscals 2015 and fiscal 2023. The stretch has no alternate routes.

 

Dewas Bhopal Corridor Pvt. Ltd (DBCPL)

This 140.8 km stretch is the shortest route between Indore (through Dewas) and Bhopal, two major cities of Madhya Pradesh. The project achieved PCOD in fiscal 2009 and COD in fiscal 2011 and has a track record of over 13.5 years with balance concession life of around 10.5 years. Traffic registered a CAGR of 6.7% between fiscals 2015 and 2023. The stretch has no alternate routes.

 

Ulundurpet Expressways Pvt. Ltd (UEPL)

The 72.9 km stretch connects Chennai to the southern, eastern and western parts of Tamil Nadu. The project achieved COD in fiscal 2010 and has a track record of three years with balance concession life of around four years. Traffic registered degrowth in CAGR of 0.6% between fiscals 2015 and 2023. There are no alternate routes to the project road.

 

Nirmal BOT Private Ltd (NBPL)

This road stretch connects Kadtal to Armur in Telangana and has balance concession life of around five years. The project has track record of timely receiving 28 semi-annual annuities without any material deduction.

 

Shillong Expressway Pvt. Ltd (SEPL)

This project is part of the Shillong bypass in Meghalaya and has balance concession life of around three years. The project has track record of timely receiving 21 semi-annual annuities without any material deduction.

 

Udupi Tollway Pvt. Ltd (UTPL)

It has two four-lane stretches — 74.8 km Kundapur-Surathkal section and 15.3 km Mangalore-Kerala border section — on NH-66 in Karnataka. The project achieved PCOD in fiscal 2017 and has a track record of over six years with balance concession life of around 12 years. Traffic registered CAGR of 6.4% between fiscals 2017 and 2023. The stretch has no alternate routes.

 

Ateli Narnaul Highway Pvt. Ltd (AN)

This is the 40.8 km Ateli-Narnaul section of NH-11 in Haryana operating on HAM basis. The project has track record of timely receiving 3 semi-annual annuities without any material deduction.

 

Gurgaon Sohna Highway Pvt. Ltd (GS)

It is a 12.7 km Gurgaon-Sohna section of NH-248A in Haryana operating on HAM basis. The project has track record of timely receiving 3 semi-annual annuities without any material deduction.

 

Rewari Ateli Highway Pvt. Ltd (RA)

This is the 30.5 km Rewari-Ateli section of NH-11 in Haryana operating on HAM basis. The project has track record of timely receiving 4 semi-annual annuities without any material deduction.

 

Over and above the existing assets, HIT had signed SPAs to acquire one HAM project of H.G. Infra (part of the transaction from which three HAM assets have been acquired), BETPL which is currently held by Galaxy and two SPVs (STPL and GRICL) owned by Macquarie group. These acquisitions of HAM asset of H.G. Infra, BETPL, STPL and 56.8% stake in GRICL are, subject to satisfaction of conditions, expected to be concluded in fiscal 2024.

 

HIT is in the process of raising additional debt of up to Rs 720 crore which will be utilised towards repayment of unsecured debt in the SPVs, out of which non-convertible debentures of Rs 500 crore have been issued by HIT recently.

 

Also, in relation to the acquisition of UTPL, BETPL and four HAM assets of H. G. Infra, HIT is in the process of raising additional debt of up to Rs 2,400 crore as well which consists of rupee term loan of Rs 1,900 crore (~Rs 1,321 crore drawn as on date), CP with maturity value of Rs 275 crore (completely drawn as on date) and NCDs of Rs 225 crore (yet to be drawn down). Currently, HIT has concluded the acquisition of UTPL and three HAM projects owned by H.G. Infra in November 2023.

Key Financial Indicators

Particulars	Unit	2023	2022*
Revenue	Rs.Crore	615	NA
Profit After Tax (PAT)	Rs.Crore	34	NA
PAT Margin	%	5.6	NA
Adjusted debt/adjusted networth	Times	3.37	NA
Adjusted interest coverage	Times	1.97	NA

*Financial indicators not meaningful as HIT was incorporated in December 2021 and assets have been acquired in August 2022

Annexure - Details of Instrument(s)

ISIN	Type of instrument	Date of allotment	Coupon	Maturity date	Issue Size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Term loan	NA	NA	31-Mar-2036	800	NA	CRISIL AAA/Stable
NA	Term loan	NA	NA	31-Mar-2036*	1900	NA	CRISIL AAA/Stable
INE0KXY07018	Non-convertible debentures	23-Sep-2022	7.71%	22-Dec-2025	400	Simple	CRISIL AAA/Stable
INE0KXY07026	Non-convertible debentures	23-Sep-2022	8.25%	22-Sep-2029	250	Simple	CRISIL AAA/Stable
INE0KXY07034	Non-convertible debentures	18-Jan-2024	8.34%	18-Jan-2027	500	Simple	CRISIL AAA/Stable
NA	Non-convertible debentures^	NA	NA	NA	220	Simple	CRISIL AAA/Stable
NA	Commercial paper	NA	NA	7-365 days	275	Simple	CRISIL A1+

*The maturity can be extended to June 2040 depending on the grant of concession extension for GEPL

^Proposed NCDs and yet to be placed