Recovery from stressed roads to rise 700 bps for ARCs this fiscal: CRISIL Ratings

Asset reconstruction companies (ARCs) will witness their cumulative recovery rate for stressed road projects rise 700-1,000 basis points (bps) this fiscal after doubling to 50-55 per cent last fiscal, the CRISIL Ratings said in its report.

This will be fuelled by the National Highways Authority of India (NHAI) initiating annuities as a result of the quicker completion or descoping of ongoing construction, which will allow for quicker debt restructuring, the report added.

Furthermore, recoveries should be aided by a robust rise in toll collections, as per the report. This is supported by a study of the security receipts (SRs) which cover approximately 2,500 lane kilometres of underlying stressed road projects with a total principal debt of approximately Rs. 6,000 crore (about 60 per cent of road assets with ARCs). These include projects that were purchased by ARCs at an average haircut of 40 per cent under the hybrid annuity model under NHAI and the build, operate, and transfer model (toll assets).

Most of the projects in the CRISIL Ratings SR portfolio experienced stress between 2017 and 2019 as a result of either lower-than-anticipated toll collection or delays in acquiring land and getting a government Right of Way (RoW). Of these, half have seen the completion of construction while descoping of pending RoW was done for the rest of the assets, as per the report.

The global analytical company added that the 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 should lead to a growth of 7-9 per cent in toll revenues this fiscal which will support the recoveries from such roads, the report added. "ARCs will benefit from stressed road asset recoveries with a 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 expectoutstanding SRs for these assets to be recovered over the next 3-4 years -- within the stipulated timelines ofrecovery for ARCs," said Sushant Sarode, Director, of CRISIL Ratings.

The report further added that the improvement in performance is also reflected in the debt-to-toll ratio improving from 8.1 to 6 times and debt to debt-to-annuity ratio strengthening from 0.8 to 0.6 times within 1-2 years of restructuring for the rated stressed road assets.

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, the report added. It further added that over time, the landscape for recoveries in stressed road assets has benefitted from the key role played by the NHAI in supporting recoveries through termination payouts.

A separate study of four terminated road projects with outstanding debt of 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, the global analytical company added.