BackIndia’s construction drive leading to record highway debt binge
Road-builder debt surges sixfold since Modi took office; Crisil likes project-specific bonds, worries about bank loans
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While India’s Prime Minister Narendra Modi is running into obstacles in his plan to build 30 kilometers of highway every day, construction companies are still binging on debt.
IL&FS Transportation Networks Ltd and IRB Infrastructure Developers Ltd are among the top seven road builders by market value in India that have raised ₹ 10,700 crore ($1.61 billion) in bonds and loans since Modi took office in May last year, increasing their debt burden sixfold. When the opposition was in power, their average annual borrowings totaled ₹ 1,650 crore.
Investors are taking a gamble on Modi’s ability to clear stalled investment initiatives, estimated at 279 projects worth ₹ 12.5 trillion, even as his bid to ease land purchase laws languishes in parliament. Ratings companies have welcomed the bond bonanza because it involves special purpose vehicles tied to a particular project and its cash flows.
“While the debt taken at the project special purpose vehicle level will be serviced from the project, what remains a concern is the debt taken to fund the equity portion," Manish Kumar Gupta, a director at Crisil Ratings Ltd., the local unit of Standard & Poor’s, said. “We need more support from the government as issues like land acquisition still persist and banks are also turning more cautious than ever to lend."
Modi has struggled to pass key economic proposals through the opposition-controlled upper house of parliament and last month stepped back from a move to make it easier for companies to acquire land after increased resistance from farmers. The nation’s economic growth slowed to 7% in the three months ended June, down from 7.5% the previous quarter.
BlackRock Inc. and Tata Asset Management Ltd say progress on unclogging India’s transport links has emerged as a bright spot at a time when other pieces of Modi’s agenda have been stalled by political wrangling. The roads ministry said in July it plans to roll out $45 billion of projects over the next three years, more than twice the value of contracts given since the government came to power.
The pace of construction has also rebounded, to about 13 kilometers a day from just 3 kilometers when Modi took over, the ministry’s website shows. The government plans to sanction 20,000 kilometers of projects in the coming three years and the target for the year to March 2016 has been set at 8,000 kilometers.
Bank loans
“There is renewed optimism in the sector," said Karunakaran Ramchand, a managing director at IL&FS Transportation, the nation’s oldest road builder. “The government has made a number of changes in approaching issues raised by developers and contractors, foremost among them being the availability and accessibility to senior levels to discuss and sort out issues."
IL&FS Transportation said on Wednesday it signed a concession pact for the widening of part of a national highway at a cost of about ₹ 2,290 crore. It sold yuan-denominated bonds in Hong Kong in March and has tapped the local currency market four times this year paying coupons ranging from 10.5% to 11.8%. That compares with an overall weighted average fixed coupon for its rupee-denominated notes of 11.71%.
There’s little alternative but to raise debt to fund road projects, according to Paresh Mehta, the chief financial officer of Ashoka Buildcon Ltd. Companies often don’t have the equity to finance an entire project’s cost and borrowers are increasingly replacing their existing bank loans with bonds to trim expenses, he said.
“Bond investors are more than happy to subscribe to toll-based road projects because certainty of revenue is very high," Mehta said. He expects pension funds and insurance companies will invest in expressway builders’ bonds.
Bond sales will continue to rise as banks slow lending amid a surge in bad debt, Fitch Ratings Ltd’s local unit India Ratings and Research Pvt. said. Stressed assets accounted for 11.1% of loans in India’s banking system as of 31 March, the highest since 2002, according to data provided by the Reserve Bank of India. Loan advances increased 9.52 percent in the 12 months through 21 August. The figure hasn’t risen above 10% since mid-May.
Better bidding
Other builders adding to their bond pile include BF Utilities Ltd, Sadbhav Engineering Ltd, Simplex Infrastructures Ltd and Supreme Infrastructure India Ltd. Sadbhav Engineering, based in Ahmedabad, Gujarat in India’s west, said last month its profit margins may widen thanks to bonuses linked to the early completion of projects.
Now, typically about four to seven developers bid for projects compared with as many as 15 to 20 earlier, thereby eliminating aggressive bids, IL&FS’s Ramchand said. In the past, companies paid premiums to win contracts without calculating whether the project would generate enough revenue, risking project viability, Ashoka Buildcon’s Mehta said.
“The new developers are relatively better positioned in terms of their financial profiles, and bid aggression has come down, which is an important change in the sector," Crisil’s Gupta said.
Policy decisions such as giving companies the option to exit projects and setting a time line for environmental clearances are also helping to speed things up, Sadbhav Engineering’s chief financial officer Nitin Patel said. The company expects its order book to surpass ₹ 10,000 crore by the end of this financial year, Patel said in August.
Others aren’t so optimistic. D. Ravi Sankar, the chief financial officer at Nandi Infrastructure Corridor Enterprise Ltd., a unit of BF Utilities, said last month he didn’t think road building had gotten any boost. “All the existing road projects are making losses, and are standing examples of why a private player should not enter this industry," he said in an 6 August e-mail.
India has the world’s second-largest road network spanning about 4.87 million kilometers. The quality of its roads however is ranked below neighbors including Pakistan, coming in at 76 out of 144 countries, according to a World Economic Forum 2014-2015 global competitiveness report.
“The order flow for road builders has improved and the government’s policy is moving in the right direction," Rajaraman Venkataraman, a director for infrastructure at India Ratings and Research, said. “Debt fundraising by them will continue to rise." Bloomberg
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