TEXT-Fitch on India's infrastructure deal's credit trends

(The following statement was released by the rating agency)

Nov 26 - Fitch Ratings has today commented in a new report, "Infrastructure Finance in India: Lessons From the Front Line", that its debt ratings over recent months of a number of infrastructure project finance loans across sectors such as roads, airports, water and power shine an important and rare light on the risk profile of infrastructure assets in developing markets.

The ratings also offer commercial banks, capital markets and project sponsors a unique opportunity to understand both the credit profile of these new infrastructure asset classes, as well as the lending behaviour of India's commercial banks toward these assets.

The agency's ratings illuminate the challenges and opportunities concessionaires will face when they eventually recapitalise their projects.

A significant number of projects will be coming out of construction over the next few years, and will face either interest reset or loan refinancing dates during the critical stage of obtaining government approval for operations.

This will also coincide with the ramping up of project usage and revenues, and a more challenging financial market environment.

While the demand for infrastructure will far exceed availability for the foreseeable future, and the long-term economic value of many of these assets remains strong, Fitch believes that there are a number of important lessons to be drawn from recent experiences.

Firstly, the pricing of project risks has varied over time and depends more on the availability of capital and the nature of sponsor-bank relationships than on a broader and more rigorous evaluation of project fundamentals. Also, many of the rated projects have favourable economic profiles, which means they also have some debt carrying capacity.

Fitch also notes that almost all rated projects are still subject to construction and completion risk, which naturally constrains the current ratings profile. Many projects carry a heavy debt load, which also constrains the ratings profile.

The agency found that project cash flows are highly susceptible to construction delays, economic cycles and interest rate risk, the latter due to the frequent interest reset periods of the loans.

In addition, loan maturities are lengthening, but amortisation periods are still fairly aggressive in comparison to expected project cash flows.

Fitch also learned that most of the loans have 'covenant light' structures, although the extent of lender protection varies, to some extent, by asset class.

Fitch expects a fair amount of loan restructuring to take place over the next few years, as a wave of projects exit the construction phase and enter operations. The assigned project bank loan ratings consider the ability to restructure project debt within the remaining concession tail.

While the current environment for debt and equity is more challenging, projects with a long concession tail and strong economic fundamentals should have room for debt restructuring, if conditions warrant it.

However, for India's emerging infrastructure programme and its enormous financing needs, the prospects of competing capital requirements from old and new projects could not have come at a worse time.