Asset reconstruction companies (ARCs) are expected to witness their cumulative recovery rate for stressed road projects rising by 700-1000 basis points (bps) this fiscal after doubling to 50-55 per cent last fiscal, stated a report by CRISIL Ratings. This, it added, will be driven by faster completion or descoping of pending construction resulting in start of annuities by the National Highways Authority of India (NHAI), thereby enabling quicker resolutions or restructuring of debt. Also, a healthy increase in toll collections is expected to support recoveries.
CRISIL Ratings analysed the security receipts (SRs) rated by the firm, covering around 2,500 lane km of underlying stressed road projects with total principal debt of approximately Rs 6,000 crore (around 60 per cent of road assets with ARCs), to release the findings. These encompass projects under build operate and transfer model (toll assets) and hybrid annuity model under NHAI which were acquired at average haircut of 40 per cent by ARCs.
Most of the projects in the CRISIL Ratings SR portfolio had turned stressed between 2017 and 2019 due to delays in land acquisition and obtaining Right of Way (RoW) by the government and/or lower toll collection than initially estimated. Of these, half have seen completion of construction while descoping of pending RoW was done for the rest of the assets.
Analysing these projects, CRISIL said, now reveals that stabilising annuity payments due to faster completion of pending work or descoping of pending RoW post-acquisition by ARCs have improved liquidity for them with annuity payments adequate for servicing of restructured debt.
Per the findings of the report, traffic growth for toll assets is likely to hold steady at 4-6 per cent this fiscal with healthy macroeconomic markers (growth in industrial capex, rapid urbanisation, rising exports and tourism). This, it added, is estimated to report a growth of 7-9 per cent in toll revenues this fiscal which will support recoveries from such roads.
Sushant Sarode, Director, CRISIL Ratings, said, “ARCs will benefit from stressed road asset recoveries with healthy increase in toll collection and steady annuity payments from NHAI post completion of balance construction/descoping. The improved liquidity and stabilised cash flows are expected to drive faster debt reduction using internal accrual, or refinancing, thus raising recovery rates for ARCs. As a result, we expect outstanding SRs for these assets to be recovered over the next 3-4 years — within the stipulated timelines of recovery for ARCs.”
The debt to toll ratio improving from 8.1 to 6 times and debt to annuity ratio strengthening from 0.8 to 0.6 times within 1-2 years of restructuring for the rated stressed road assets reflected the improvement in performance. For non-operational assets or operational assets with claims under dispute, other resolution mechanisms like termination payouts with better predictive capability as well as dispute settlement through fast-tracked conciliation and arbitration for claims, will support recovery in the medium term.
Over time, the key role played by the NHAI in supporting recoveries through termination payouts has benefitted the landscape for recoveries in stressed road assets. For instance, a separate study of four terminated road projects with outstanding debt of around Rs 4,675 crore indicated a recovery of 65-70 per cent of debt on average, realised in 2-3 years from the termination date.
Tanvi Fifadra, Team Leader, CRISIL Ratings, said, “The settlement of claims under conciliation worth ~Rs 48,180 crore across 189 cases by NHAI during fiscals 2018-2023 at an average rate of 34 per cent has averted delays due to prolonged litigations. The continued focus of the NHAI on settling claims for stressed road projects can, over the near to medium term, facilitate recovery of ~Rs 5,300 crore of claims in our portfolio and revive these projects.”
That said, CRISIL concluded, sustenance of healthy toll revenue, continuation of NHAI support and timelines for recoveries will bear watching.