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ITNL has 31 road projects in its portfolio, of which 22 are operational and a third of which are annuity assets.
ITNL has 31 road projects in its portfolio, of which 22 are operational and a third of which are annuity assets.

ITNL in advanced talks to sell two road assets

Deal to sell majority stake in annuity assets to US-based I Squared Capital likely to be done in next two quarters

Mumbai: IL&FS Transportation Networks Ltd (ITNL) is in advanced talks with US-based infrastructure investment manager I Squared Capital for the sale of a majority stake in two of its annuity-based road assets, two people familiar with the matter said.

The two separate deals are likely to be closed over the next two quarters, they said.

ITNL has been looking to monetize its portfolio of operational build, operate and transfer (BOT) road assets for several months and has evaluated options ranging from listing of these projects under the newly approved infrastructure investment trust to an outright sale, in order to cut debt and fund projects under construction. One such deal has been concluded. In January 2015, the Macquarie Group acquired a 42% stake in ITNL project Gujarat Roads and Infrastructure Corp. for 650 crore, according to a disclosure in a presentation by Macquarie dated 30 September 2015.

I Squared declined to comment on talks with ITNL.

“We are definitely looking to churn assets in our portfolio... Sale of annuity assets will be our first choice because there is no traffic risk or projection to be done and cash flows are more or less certain," said K. Ramchand, managing director, ITNL.

He declined to comment on talks with I Squared Capital.

ITNL has 31 road projects in its portfolio, of which 22 are operational and a third of which are annuity assets.

Annuity-based projects are those where the developer of the project is reimbursed the cost of building the project and gets a return on investment every six months, after starting commercial operations.

ITNL’s portfolio of annuity assets, where the company holds a majority stake, include the North Karnataka Expressway Ltd, Andhra Pradesh Expressway Ltd, Hazaribag Ranchi Expressway Ltd, East Hyderabad Expressway Ltd and Jharkhand Road Projects Implementation Co. Ltd.

Other annuity assets, where ITNL holds 50% or less stake include Thiruvananthapuram Road Development Co. Ltd in joint venture with Punj Lloyd Ltd and Jorabat Shillong Expressway in partnership with Ramky Infrastructure Ltd.

Ramchand did not say which of these annuity assets the company plans to sell. He said investors would prefer to buy a stake in annuity-based assets as toll projects are seen as riskier investments.

“Investors may not want to take a risk on a toll project from day one having seen the pitfalls in forecast which has happened in the road sector," he said.

Many operational toll-based highway projects in the country are seeing a big mismatch in traffic estimates from the time the projects were awarded to actual traffic seen now, hurting returns to investors.

Investment firms, including Macquarie Group, I Squared Capital and Brookfield Asset Management, as well as the infrastructure fund of IDFC Alternatives, have been among those in talks with ITNL for buying out its operational road assets, Mint had reported in September, citing people familiar with the matter.

ITNL will have to generate 500-600 crore from selling operational projects every year to meet its capital expenditure requirements, said an analyst at a foreign brokerage, asking not to be named as he is not authorized to speak to reporters.

The company had a consolidated debt of 26,213 crore as on 30 September.

ITNL is one of India’s largest BOT road operators, with exposure to national and state highways, urban roads, tunnels, flyovers and bridges.

In BOT projects, a private operator builds an infrastructure project from its own funds, operates it for a period and then transfers it to the government.

Several infrastructure developers, weighed down by debt, continue to announce plans to monetize operational assets and repay creditors. Such exits were made easier after a new government rule introduced in August made it easier for road operators to exit operational projects.

India has attracted the attention of sovereign wealth funds, global pension funds and insurance firms looking for a majority stake in operational infrastructure assets. Deals, however, have been slow to close.

“The pace of closure in road deals is still slow and resolving the challenges that some projects face for not being able to service their debt is a hurdle for road companies," said Manish Agarwal, partner and leader, infrastructure, at PwC India.

The annuity-based BOT projects attract higher interest from investors, but lack of clearances or land acquisition does come in the way of some deals moving forward, Agarwal said.

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