Asset reconstruction companies (ARCs) will see their cumulative recovery rate for stressed road projects rise 700-1,000 basis points (bps) this fiscal after doubling to 50-55% last fiscal (see Chart 1 in Annexure). This will be driven by faster completion or descoping of pending construction resulting in start of annuities by the National Highways Authority of India (NHAI), thereby enabling quicker resolutions or restructuring of debt. Further, a healthy increase in toll collections should also support recoveries.

An analysis of the security receipts (SRs) rated by Crisil Ratings, covering ~2,500 lane km of underlying stressed road projects with total principal debt of ~ Rs.6,000 crore (~60% of road assets with ARCs) indicates as much. These encompass projects under build operate and transfer model (toll assets) and hybrid annuity model under NHAI which were acquired at average haircut of 40% by ARCs.

Most of the projects in the Crisil Ratings SR portfolio had turned stressed between 2017 and 2019 due to delays in land acquisition and obtaining Right of Way (RoW) by government and/or lower toll collection than initially estimated. Of these, half have seen completion of construction while descoping of pending RoW was done for rest of the assets.

Analysing these projects now reveals that stabilising annuity payments due to faster completion of pending work or descoping of pending RoW post-acquisition by ARCs have improved liquidity for them with annuity payments adequate for servicing of restructured debt.

Furthermore, traffic growth for toll assets is likely to hold steady at 4-6% this fiscal with healthy macroeconomic markers (growth in industrial capex, rapid urbanisation, rising exports and tourism). This should lead to a growth of 7-9% in toll revenues this fiscal which will support the recoveries from such roads.

Says Sushant Sarode, Director, Crisil Ratings, “ARCs will benefit from stressed road asset recoveries with healthy increase in toll collection and steady annuity payments from NHAI post completion of balance construction/descoping. The improved liquidity and stabilised cash flows are expected to drive faster debt reduction using internal accrual, or refinancing, thus raising recovery rates for ARCs. As a result, we expect outstanding SRs for these assets to be recovered over the next 3-4 years — within the stipulated timelines of recovery for ARCs.”

The improvement in performance is also reflected in the debt to toll¹ ratio improving from 8.1 to ~6 times and debt to annuity² ratio strengthening from 0.8 to 0.6 times within 1-2 years of restructuring for the rated stressed road assets. For non-operational assets or operational assets with claims under dispute, other resolution mechanisms like termination payouts with better predictive capability as well as dispute settlement through fast-tracked conciliation and arbitration³ for claims, will support recovery in the medium term.

Over time, the landscape for recoveries in stressed road assets has benefitted from the key role played by the NHAI in supporting recoveries through termination payouts⁴ (see Chart 2 in Annexure). For instance, a separate study of four terminated road projects with outstanding debt of ~Rs 4,675 crore indicated a recovery of 65-70% of debt on average, realised in 2-3 years from the termination date.

Says Tanvi Fifadra, Team Leader, Crisil Ratings, “The settlement of claims under conciliation worth ~Rs 48,180 crore⁵ across 189 cases by NHAI during fiscals 2018-2023 at an average rate of 34% has averted delays due to prolonged litigations. The continued focus of the NHAI on settling claims for stressed road projects can, over the near to medium term, facilitate recovery of ~Rs 5,300 crore of claims in our portfolio and revive these projects.”

That said, sustenance of healthy toll revenue, continuation of NHAI support and timelines for recoveries will bear watching.

¹ Debt to toll = Outstanding restructured debt/ Annual toll collection
² Debt to annuity = Outstanding restructured debt/ Pending annuities
³ Conciliation is mutual settlement for disputes; arbitration is formal binding resolution of disputes
⁴ As per the Model Concession Agreement, termination payout covers debt due and adjusted equity which are calculated as per the standard operating process (SOP) given by NHAI. In absence of termination payout mechanism, recovery for terminated projects could have been nil for lenders.
⁵ 189 cases resolved out of total referred 297 cases