National Highways Authority of India’s payment of mobilisation advances to developers will provide a fillip to the construction pace of hybrid annuity model (HAM) projects, says India Ratings and Research (Ind-Ra). HAM was introduced to rejuvenate the road sector and lessen the equity burden on the already stressed developers. Lenders are gradually familiarising with this contract structure
Nevertheless, case-specific impediments such as aggressive bids and stressed sponsors among others continue to delay financial closure. At the same time, the agency feels low equity in HAM projects will weigh on funding decisions. Ind-Ra said that construction funding accounts for 40 per cent of the total cost in HAM projects and is released by the authority in five tranches linked to the milestones, while the balance (60%) is arranged by the concessionaire. The developer would fund not more than 25 per cent of the non-authority component (60%), which necessitates raising debt. Therefore, the equity portion is narrowed to 15 per cent of the project cost against the earlier set pattern of 20 per cent or 25 per cent. Ind-Ra rated its first HAM Project Welspun Delhi Meerut Expressway Private Limited at ‘IND A’/Stable in June 2017. The rating reflects the project’s low revenue risk, fast pace of construction progress, favourable leverage and debt structure and comfortable debt service coverage ratios. Of the 27 HAM projects bid up to December 2016, finances have been tied up for 60 per cent. Lenders wary of funding HAM projects have gradually acclimatised to the contract structure especially the equity light model. Another 16 projects awarded later are yet to achieve financial closure. Amid lenders’ cautious approach to infrastructure, a delay of about six months is usual and the agency believes that projects battling financial closure could be due to case-specific issues. Simultaneously, sponsor’s experience, capabilities in executing projects on a timely basis and debt service coverage ratios are crucial in taking funding decisions.