India Ratings affirms infra sector outlook negative
India Ratings has maintained an overall negative outlook for Indian infrastructure projects for 2013, considering project companies‘ continued weak credit profiles.
India Ratings has maintained an overall negative outlook for Indian infrastructure projects for 2013, considering project companies’ continued weak credit profiles. However, some sub-sectors have a split outlook. The outlook for power projects remains negative while certain pockets in the transportation sector have a stable outlook.
The agency observes that a range of recent policy initiatives announced by the government are encouraging and have kindled a sense of optimism among market participants. However, it believes that the process of addressing fundamental risks through concrete and sustained on-the-ground actions to repair damaged credit quality is likely to be protracted. The policy initiatives include a presidential directive to the state-owned Coal India Ltd to sign fuel supply agreements, financial restructuring of distribution utilities, constitution of the Cabinet Committee on Investments and the likely introduction of the Land Acquisition Bill in the ensuing Budget session of Parliament.
India Ratings expects that in 2013 a number of projects are likely to default on their bank debt obligations. Alternatively, lenders might be compelled to approve forced debt restructuring packages. This is in view of their weak financial structures and multiple risks including construction delays, plant stabilisation issues and fuel supply constraints in the power sector and traffic under-performance in the transportation sector. Reduced sponsor capacity to extend support would also likely contribute to this phenomenon. In a majority of the agency’s rated infrastructure projects, sponsors have played a significant role in preserving the credit profile of their projects. Deterioration in sponsor’s profile will impair their ability to keep supporting projects that have a low economic value.
Some of the macro-economic variables – a pick-up in GDP growth rate, abatement of inflationary pressures and the expected drop in interest rates – may turn favourable during 2013. This may result in cash flows of infrastructure projects experiencing some improvement though the ‘lag’ effect would imply that benefits are unlikely to accrue immediately.
India Ratings maintains a negative outlook for power projects. Many projects face protracted delays in completion – either because of technical issues such as longer plant stabilisation or due to slow land acquisition for plant area, constraints in developing railway and transmission infrastructure and delays in operationalising captive coal mines. Fuel shortage, off take risks and counterparty credit profiles are compounding the issues faced by these projects, making them vulnerable to ratings downgrades.
Construction delays and traffic underperformance will remain the two most important rating drivers for toll road projects in 2013. Many projects exhibit stable characteristics with drastic rating downgrades averted only on account of expectation of continued sponsor support to fund cost overruns and/or bridge marginal revenue shortfalls in case of operating assets. The ratings of availability-based (annuity) road projects will be stable in 2013 because of low revenue risks and simple maintenance requirements considering the operator-cum-sponsor’s track record in the sector.
The regulatory clarity that has emerged from the recent orders on project costs and the levy of airport development fee has provided relief to airport credits. However, global economic uncertainties and slowing growth in India coupled with rising air fares have led to negative growth in domestic passenger enplanements; international passenger traffic has grown at a slower rate. The agency views this fall in passenger enplanements as cyclical and believes that it is unlikely that long-term forecasts would not be achieved, given the strong growth recorded over the last six-seven years.
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