Ind-Ra has also assigned L and T MRHL's INR3,600m bank guarantee facility and INR1,240m derivative facility an 'IND BBB+' rating.
Key Rating Drivers
The rating benefits considerably from an extremely strong project sponsor, L and T Infrastructure Development Projects Limited (L and T IDPL), and Larsen and Toubro Limited (L and T), which holds 97.59pc of L and T IDPL's equity.
Ind-Ra expects the project to benefit largely from the strong operational, management and financial support from L and T IDPL.
Besides committing equity of 21pc of the project cost, the sponsors are required, in terms of the financing package, to meet upto 5pc of cost over-run, extend funds to bridge any delays in receipt of construction grants from the Government of Andhra Pradesh (GoAP) and to provide cash support of INR5,030m during the operations phase.
L and T MRHL's size, strategic importance to the sponsors and the extent of ownership make it a key project in L and T IDPL portfolio.
Also, L and T has extended its name to the project and the legal entity and so Ind-Ra believes L and T IDPL will extend additional support in view of the potential reputational risks arising out of delayed implementation.
This can include additional infusion of funds to the project during possible periods of stress as and when required even though the project is being executed in a special purpose vehicle (SPV) on a non-recourse basis.
However, the rating is constrained by significant revenue risk for this greenfield project. Farebox revenues have been estimated on the basis of normalised ridership forecasts made by L and T-Ramboll Consulting Engineers Ltd.
Despite a detailed analysis of various factors likely to impinge on patronage, cash flows will remain vulnerable to forecasting errors.
Although the project is underpinned by a strong economic rationale, the actual usage of the metro rail in terms of ridership and growth will become clear only after the project becomes operational.
Price risk is moderate as ticket fares are pre-defined in the concession agreement with annual escalation based on inflation indices (60pc of Wholesale Price Index) plus 5pc . The first increase of 5pc will take effect on 1 April 2015, and the last and fifteenth such increase will be effective 1 April 2029.
The dependence of project revenues on rental income from planned real estate development is another significant risk factor. This is because it will be difficult for farebox revenues alone to adequately meet debt service requirements on the loan.
Nearly 35pc -40pc of annual revenues are projected to come from parking fees, advertising income and real estate rentals from the transit-oriented development along the project corridor and the three depots.
The ratings also take into account the project's significant completion risks given its size, scope and complexity. However, this is largely mitigated by a comprehensive suite of contracts with various reputed vendors - many of them global players - for specialised packages such as rolling stock, signalling and communication and safety systems.
L and T, one of the largest engineering and construction companies in India, is the contractor for executing the civil works, track works and mechanical, electrical and plumbing works; the company is executing similar works for metro rail projects in other Indian cities.
The concessionaire's engineer which is a consortium led by AECOM India Private Ltd, will ensure coordination and technical and functional interface across multiple vendors and systems.
The overall project cost, estimated at INR163,750m, will be funded by sponsor funds (INR34,390m), long-term bank debt (INR114,780m) and grants from GoAP (INR14,580m).
The commencement of operations is planned in six stages with the final commercial operation date scheduled for 4 July 2017. The high capital intensity and the long construction period of five years (with commencement of operations planned in six stages; final commercial operation date scheduled for 4 July 2017), exposes the project to possible cost over-runs.
That said, the lump sum fixed price contracts executed by L and T MRHL for major construction packages insulate the project from cost overrun to an extent. Also, providing requisite land and right of way (RoW) is the GoAP's responsibility.
As on date, the RoW required for the first stage (8.1kms) and parts of RoW required for other stages are available with the project and construction is progressing on as scheduled.
The lenders' independent engineer has opined favourably on the overall construction planning and project management setup besides the achievability of the timelines.
A 15-month principal moratorium on the rated bank debt offers some cushion during the critical ramp-up phase. The interest rate is variable with provision for reset once every two years. Around 30pc of the loan carries a bullet repayment on 30 June 2027, exposing the project to refinance risk. However, this is mitigated by the 20-year tail in the concession. Also, the sponsor's reputation should help project refinance the loan.
The project's structural features include a cash trap mechanism wherein during the last three years of the loan, all surplus cash in excess of 1.1x debt service coverage ratio (DSCR) will be transferred to a separate reserve account.
A sum of INR4,970m has been budgeted as part of the project cost, available as DSCR support during the operational phase, when required. The loan agreement stipulates the need to create a debt service reserve account equivalent to three months principal and interest.
However, since this is envisaged to be created out of operating cash flows somewhat dilutes its efficacy as it is unlikely to be available in a situation where revenue ramp-up is weaker than expected.
Ind-Ra does not expect the rating to be upgraded during the construction phase. Major unforeseen events leading to material delays in the construction progress may result in an Outlook revision or a rating downgrade.
L and T MRHL, sponsored by L and T IDPL (99pc ) and L and T (1pc ), is an SPV set-up to design-build-finance-operate and transfer a 71.16km long, three-line elevated metro, including 66 stations, under a 35-year concession, extendable by 25 years, from GoAP.
The project will also include around 18.5 million sq ft of transit oriented development in the earmarked parking and circulation areas and depots.
--IBNS (Posted on 19-07-2013)