Rating Rationale

Strengths:
* Stable revenue profile, given annuity-based model of highway project:
ONBHL receives annuity payment from National Highways Authority of India (NHAI; rated 'CRISIL AAA/Stable'). Under the annuity concept, NHAI makes a fixed semi-annual payment over the concession period to the concessionaire. Since the concessionaire does not bear any traffic risk, the project is insulated from any demand risk. ONBHL has, till date, received seven annuity payments commencing August 21, 2015, without any delays or deductions. CRISIL believes annuity nature of the project and strong counterparty mitigates risk of delay in payment of annuity. Any significant delay in receipt or quantum of fixed annuity payment will remain a key rating sensitivity factor.

* Well-defined structured payment waterfall mechanism:
The waterfall mechanism ensures the NHAI annuity is used for NCD investor payouts after meeting statutory dues and payments towards NHAI. The structure also stipulates upfront creation of a debt service reserve account (DSRA) equivalent to principal and interest dues for nine months. There is adequate cushion of at least 30 days between receipt of the annuity and debt repayment. Further, DSRA provides adequate liquidity in case of delay in annuity payment.

Moreover, there is an upfront additional reserve of Rs 25 crore over and above the DSRA towards meeting excess operations and maintenance (O&M) or major maintenance costs, which, if utilised, will lead to cash trapping of all future surplus. In addition to the trustee monitored waterfall mechanism, the bankruptcy remote legal structure from the rest of the group also supports the transaction structure.

Weakness:
* Exposure to O&M and major maintenance risk:
Timely and full release of annuity from NHAI largely depends on proper maintenance of the road. Further, frequent occurrence of material breach in the O&M and maintenance requirement may also result in the contract being terminated by NHAI. However, routine nature of O&M expenses, fixed-price contract with O&M contractor (Oriental Structural Engineers Pvt Ltd [OSE], which has extensive experience in road construction), low costs against annuity receipts, and adequate budgeting for major maintenance reserve as per the base case business plan in the term sheet mitigate the aforementioned risk.

* Risks related to pending construction:
The construction of balance stretch of 2.38 km has been completed, however, construction of 0.32 km of service road and toll plaza on MH section is still pending due to non-availability of land. CRISIL believes risk of completion of balance work is adequately mitigated by creation of construction reserve of Rs. 8.73 crore. Any increase in construction cost not funded by the sponsors will remain a rating sensitivity factor.

Post adoption of IndAS there has been a revision in the accounting treatment of annuity revenue leading to an increase in tax payments over the medium term. CRISIL has factored in higher tax payouts in its DSCR assessment. ONBHL proposes to raise additional series, with terms similar to that of earlier series, once it receives NHAI approval for the same. CRISIL understands that the quantum of the additional debt to be raised will be prudent so as to maintain the debt coverage metrics at earlier levels.