Elaborating further, Rajeshwar Burla, Vice President, Corporate Ratings, ICRA says, “Under force majeure (political) event, 100% of O&M and interest costs are reimbursed for the affected period. This would cover around 50-55% of loss of revenue incurred by these projects. However, quantum and timelines for release of compensation is uncertain as on date. Nevertheless, around 87% of ICRA rated toll road projects (excluding default category credits) have debt service reserve (liquidity buffer) greater than or equal to one quarter of debt obligation (includes principal and interest) and are resilient enough to absorb the toll suspension.”
Of the ICRA rated universe in road sector, 34 projects (50%) are either annuity or hybrid annuity projects which are devoid of market risk. Of the remaining 34 projects, ratings of seven entities are credit enhanced based on explicit support from strong promoters. The ratings of remaining 27 entities are based on the strength of the standalone cash flows and are exposed to market risk by virtue of being toll road projects. Four out of 23 credits rated in non-default category have high exposure to passenger vehicle (PV) and bus categories (in excess of 40% in terms of passenger car units). These projects are close to large urban agglomerations. Road stretches catering to major pilgrim centres and tourist destinations which are dominated by passenger vehicle (PV) movement have witnessed significant moderation in traffic movement starting second week of March, 2020.
Drawing parallels with de-monetisation in November 2016; Burla added, “after the 24-day period toll suspension post de-monetisation, NHAI offered compensation to the toll road SPVs under force majeure clauses wherein it had reimbursed 90% of O&M and interest costs corresponding to the affected period. While pandemic (Covid-2019) falls under force majeure (non-political); the toll suspension following lockdown would fall under force majeure political event and hence would be compensated. Also, it took more than two quarters post de-monetisation for the traffic to revert to its earlier levels. Similarly, after the containment of Covid-2019; the toll road projects may take at least one quarter to revert to their earlier levels.”
Freight movement has a strong correlation with the health of the economy and thereby the toll collections exhibit good correlation with the movement in GDP. Therefore, the detrimental impact of Covid-2019 on the overall economy would in turn affect the movement of commercial freight on the road stretches. Further the slowdown in the economy could also result in benign inflation rate which is a key input for arriving at the toll rates. Therefore, a combination of compression in GDP growth along with benign inflation would adversely impact the toll collections in FY2021. The impact would depend on the intensity, duration and spread of Covid-19 outbreak.