Give banks pari passu rights, based on NHAI valuation
With half of the build, operate, transfer (BOT) expressways being constructed right now in danger of default according to an analysis by credit rating firm Crisil—it estimates 40% of completed BOT projects are also in serious trouble and need FY16 toll to rise 37% against a likely 10%—the government clearly needs to do something. All told, including the completed BOT projects, Crisil estimates Rs 63,000 crore of outstanding debt is at risk. With most promoters too stretched to be able to pump in the necessary funds to revive these projects, both banks and the National Highways Authority of India (NHAI) have to chip in. The problem is that while NHAI is willing to put in a one-time funding into the project, it wants first charge on the tolling receipts—once the project is ready—so as to get its money back. The banks, in turn, want access to the toll receipts if they are to give fresh funds—they want such rights in proportion to their investment, or pari passu to use legal language. Given how banks have hopelessly over-lent to projects, it is not surprising NHAI is opposing such pari passu rights. If a project was valued at Rs 1,000 crore by NHAI, in most cases banks looked the projected earnings stream from toll receipts and discounted that to arrive at a project value, typically several times more than the NHAI value. Were the government to give banks pari passu rights based on the inflated lending on some obviously gold-plated projects, NHAI fears it will not be able to recover its funding for a long time.
NHAI clearly has a point, but the banks also need some comfort if they are to lend more—the alternative is to let Rs 63,000 crore of bank debt to go down the tubes. An acceptable solution, to be discussed at a meeting with the finance minister next week, could be to agree to the banks’ demand, but with a caveat. While working out the relative shares of the banks and NHAI in the expressways, don’t use the valuation at which the banks have lent to the projects but use the value NHAI estimated in the first place. This will, of course, mean a considerable potential haircut for banks since, in some high profile cases, they valued expressways at 2-3 times what NHAI had valued them at—in his paper Sub-prime Highways, Gajendra Haldea, who used to be advisor to the Planning Commission deputy chairman, had listed 20 projects where banks had valued them at Rs 26,000 crore versus NHAI’s Rs 13,700 crore. The alternative for banks, if they reject this method of calculating the pari passu rights, is to potentially lose all their lending with the expressways lying incomplete. In any case, even if banks agree to the modified formula, they stand to lose a lot of their money since, as Crisil points out in the case of the completed BOT projects, the growth required in toll receipts is very high compared to the actual levels being achieved.