(The following was released by the rating agency) Link to Fitch Ratings' Report: Indian Toll Roads: A Bumpy Ride here
CHENNAI/SINGAPORE, March 14 (Fitch) Fitch Ratings says in a new report that traffic under-performance is a key risk for many Indian operational toll roads. A majority of Fitch-rated toll road projects in India have seen actual first-year traffic underperform projections, and in some cases by up to 45%. Traffic performance is rarely in line with, or above, management expectations.
The accuracy of traffic estimates, as demonstrated by actual first-year revenue, is key to a project's ability to meet debt service obligations. "However, many traffic studies are based on point-in-time traffic counts and standardised growth estimations, often failing to adequately measure local economic drivers, and their dynamic and interactive impact" says Shyamali Rajivan, Associate Director in Fitch's Global Infrastructure & Project Finance. "Traffic growth projections based on these studies also do not account for the impact of economic cycles on traffic growth rates."
The widespread overestimation of traffic could also in part result from sponsor optimism, motivated by lucrative construction contracts in competitive bidding. In some rare cases, overestimation could result from unanticipated exogenous events such as a change in regulation or the unexpected delay or cancellation of a planned special economic zone. The unsatisfactory ramp-up experience of several Fitch-rated toll road projects in India, and the consequent difficulties in servicing debt through operational cash flows, has resulted in several downgrades.
In recent years, high inflation in India has allowed toll roads to partially mitigate the negative impact of traffic underperformance on overall revenue through inflation-linked toll rate increases, specified in most concession agreements. However, in the medium-long term, the elasticity of traffic demand in India to increased toll rates has not been adequately tested.
Toll roads that became operational during the 2008-2009 economic slowdown were affected by a variety of factors. Significant traffic under-performance in the first operational year was compounded by slower-than projected traffic ramp-up. These projects also endured a rising interest rate regime. As a result, the revenue under-performance was reinforced in each successive operational year ), and traffic and revenue has not "caught up" to original estimates.
Most toll road projects in India are highly leveraged, with low projected debt service coverage ratios (DSCR) and weak structural features such as low debt service reserves and compressed debt repayment. Combined, these factors leave DSCRs highly susceptible to any deterioration in traffic, particularly in conjunction with stresses in other variables, such as interest rates. However, Fitch notes that even under severely stressed situations, most projects typically retain the long-term economic capacity to fully repay debt, though the short-medium term stress to cash flows could result in debt restructuring.
The report, 'Indian Toll Roads: A Bumpy Ride', is available on www.fitchratings.com or by clicking on the link above.