Govt plans to buy back NHAI bonds worth Rs 50,000 - 70,000 crore to pare co’s debt

NHAI is has an expenditure of Rs 1.62 lakh crore for road building in FY24.

The central government has started discussions with the National Highways Authority of India's (NHAI) long-term bond holders for the prepayment of three NHAI bonds, a letter sent by the NHAI on August 11 to one of the bondholder banks, seen by Moneycontrol, says.

While the letter doesn't give details about the total quantum of bonds that will be bought back, sources said that the Ministry of Road Transport and Highways (MoRTH) is planning to spend around Rs 50,000 - Rs 70,000 crore as part of its plans to deleverage NHAI's balance sheet as the government looks to reduce NHAI's debt to Rs 1 lakh crore from around Rs 3.35 lakh crore.

Who are the bondholders?

As part of the negotiations, the central government has reached out to the State Bank of India (SBI), Punjab National Bank (PNB), Aditya Birla MF, Axis MF, Morgan Stanley, and ICICI Bank that have subscribed to the bonds.

Emails sent to these banks, mutual funds, NHAI, and MoRTH remained unanswered at the time of publishing.

Which are the bonds?

MoRTH has identified the 7.11 percent - AAA Rated bond of face value Rs 10 lakh which matures on September 18, 2025, the 7.29 percent - AAA Rated bond of face value Rs 1,000 which matures on March 9, 2026, and the 8.3 percent - AAA Rated bond of face value Rs 1,000 which matures on January 25, 2027 for the buyback, the letter said.

The government's buyback plans are part of its discussions to cap the capital expenditure in the roads and highway sector.

The Centre has already sidelined the Bharatmala project and has asked MoRTH and NHAI to push for more public private partnership (PPP) projects to develop highways in India.

"A portion of the fund allocated to the MoRTH will be used for the prepayment of NHAI bonds, which is being considered as an option for reducing its debt," a senior government official told Moneycontrol. If discussions with bond holders are fruitful, the government may consider buying back bonds worth Rs 50,000 crore to Rs 70,000 crore, he said.

The NHAI 7.11 bond is currently being traded at a 9.23 percent premium to its original face value, while the NHAI 7.29 bond is currently being traded at a 9.8 percent premium to its original face value and the NHAI 8.3 bond is currently being traded at a 15 percent premium to its original face value, according to data available on ICICI Direct website.

Why did finance ministry ask MoRTH to reallocate capex?

The Finance Ministry had asked MoRTH in 2023 to reallocate the capital expenditure allocated in the budget for other purposes like reducing the debt of NHAI and reducing the import dependence on road construction equipment.

“The finance ministry had asked MoRTH to reallocate capital expenditure into other avenues like reducing the debt of NHAI, reducing import dependence of road construction equipment, especially tunnelling equipment from China, and setting up institutions to boost skill development,” another official said.

Following the finance ministry’s suggestion, MoRTH is now looking to utilise the Rs 2.78 lakh crore  allocated to the ministry in Budget for 2024-25 to reduce the debt of NHAI.

The first official added that if investors show no interest in letting go of the NHAI’s high interest-bearing bonds, the funds will be used to award highway projects towards the end of 2024.

NHAI had raised funds through fixed coupon rate bonds with tenures of five, 10, 15, 20, 25 and 30 years, respectively. A number of these bond issues, the last of which came in 2021-22, are maturing between 2025 and 2030. The move would allow NHAI to deploy more capital for strengthening the highway network, and bring down interest payments, which are taking up a big chunk of the government’s annual budget allocations.

Need for private investment

The cabinet’s decision to not approve the revised cost of the Bharatmala Pariyojana, which has risen from Rs 5.35 lakh crore in 2017 to around Rs 11 lakh crore (which was the government's total infrastructure capital expenditure target for 2024-25), was taken after the Comptroller and Auditor General (CAG) in August 2023 flagged cost overruns in many of the high-cost Engineering Procurement and Construction (EPC) projects under the scheme, including the construction of the Dwarka Expressway project and the Delhi-Vadodara Expressway.

The deadline for completion of all its projects under the Bharatmala Phase-I scheme was also extended to 2027-28, six years from the original schedule, MoRTH said in its annual report for 2023-24.

“The government cannot sustain a 20-odd percent growth in capital expenditure every year for the next five years. Private capex needs to be brought in to sustain growth in the future,” another government official said.

Investment bank Goldman Sachs had also, in multiple reports in 2023 and 2024, mentioned that the rapid pace in the government’s capex growth in the past few years cannot be sustained for too long. The investment bank had added that private investments will need to pick up as public capex peaks.

"Growth of private investments in the highway sector has been slow despite the Centre's ambitious capital expenditure in the highway segment in the the last five years,” the second official told Moneycontrol. He added that unlocking private capital investment is key for the sustainable growth of the road and highway industry in the coming years.

MoRTH is now planning to award road projects under the PPP mode, with NHAI expected to soon come up with tenders for 15 road projects worth Rs 44,000 crore, covering 900 km, for bids under the Build-Operate-Transfer (BOT) mode. If successful, this could mark the comeback of the PPP  projects in highways.

Road transport secretary Anurag Jain had, on August 3, said that bigger projects, costing more than Rs 500 crore, would preferably be taken up under the PPP mode. Under PPP, projects are offered under the BOT and hybrid annuity (HA) models. He had said  that the decision was taken, considering that the projects built under PPP are of better quality and require less maintenance compared to government- funded projects.

NHAI's balance sheet

In the Union budget for 2024-25, the Centre allocated Rs 1.68 lakh crore to the NHAI, marginally higher than the Rs 1.67 lakh crore provided in 2023-24, and the Rs 1.41 lakh crore provided in 2022-23. The rise in budgetary allocation to the NHAI is in line with the government’s strategy to recapitalise its balance sheet with higher budgetary support and zero market borrowings.

The government has once again set the NHAI's internal and extra-budgetary resources (IEBR) as negligible in 2024-25, marking the third straight year when the NHAI's market borrowing has been set as negligible. In 2023-24, the government had asked the highway developer to limit its borrowings. As per the government's revised estimates, the NHAI had raised no money as IEBR in 2023-24. IEBR comprises funds by way of profits, loans, and equity.

NHAI’s debt fell to Rs 3.35 lakh crore at the end of March 2024, from Rs 3.43 lakh crore at the end of March 2023 and Rs 3.49 lakh crore at the end of March 2022.

The reduction was a result of the absence of incremental debt in 2023-24 and a sharp drop in the borrowings to Rs 9,797 crore 2022-23 from Rs 70,000 crore in 2021-22. Furthermore, the proceeds received from the NHAI's InvITs (Infrastructure Investment Trust) have been utilised to repay the debt obligations.

Historically, despite substantial allocations through the budgetary provisions every year, the NHAI's incremental borrowings were higher than the yearly repayment, leading to an annual increase in the total debt outstanding at the year-end.

However, after the central government funded nearly its entire business plan through the Union budget from 2022-23, NHAI’s gearing declined to 0.47x at FYE24 from a peak of 1.18x at FYE21. Gearing refers to the relationship, or ratio, of a company's debt-to-equity.

The NHAI's debt stood at Rs 24,188 crore in 2014-15, when the National Democratic Alliance had first taken over, marking a 14-fold rise in the last 10 years.