Expected Increase in M&A and Refinancing Activity for HAM Projects in India: ICRA
According to the ratings agency ICRA, there is expected to be an increase in mergers and acquisitions (M&A) and refinancing activity in highway asset management (HAM) projects in the upcoming quarters. Approximately 105 HAM projects, with a total bid project cost of INR 1.22 lakh crore, are expected to become operational in the next two years, and around INR 0.90 lakh crore of debt associated with these projects could potentially be refinanced.
Around 280 projects with a total bid project cost (BPC) of Rs. 3.21 lakh crore were awarded under HAM model till September 2022 since its introduction in January 2016. HAM accounted for around 40% of the total projects awards by the NHAI during FY2016 and H1 FY2023. Further, HAM is expected to account for around 45-50% of the NHAI awards in FY2023 and FY2024. Of the HAM projects awarded since January 2016, a total of 71 projects with cumulative BPC of Rs. 80,818 crore became operational during FY2019-H1FY2023. Of this, 23 projects with a cumulative BPC of Rs. 27,446 crore (34%) were sold to InvITs and PE players in the last two years.
Vinay Kumar G, Vice President, Corporate Ratings, ICRA, said, “The valuation of HAM projects has sweetened in the recent quarters with hardening in interest rates as annuities in HAM assets are linked with RBI’s bank rate, which is on an upward trajectory. Once a HAM project becomes operational, the risk profile witnesses significant improvement upon completion and track record of 1-2 semi-annuities. The developers are looking at refinancing to reprice their debt or avail top-up loans for future equity commitments.”
HAM as a model has evolved over the years since its introduction in January 2016. The interest in annuities for HAM projects is sizeable, amounting to around 45 per cent of overall inflows during the concession period. With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs, thereby reducing the interest rate risks to a large extent. Also, the payment milestones were increased from 5 to 10 to improve the cash conversion cycle for developers. Given that the developers are quoting abnormally low O&M bids, NHAI had changed the bid parameter to BPC alone while doing away with the quoting of O&M cost in May 2022. In lieu of this, the bidder would be paid a fixed percentage of BPC as O&M during the operations period.
Around 280 projects with a total bid project cost (BPC) of Rs. 3.21 lakh crore were awarded under HAM model till September 2022 since its introduction in January 2016. HAM accounted for around 40% of the total projects awards by the NHAI during FY2016 and H1 FY2023. Further, HAM is expected to account for around 45-50% of the NHAI awards in FY2023 and FY2024. Of the HAM projects awarded since January 2016, a total of 71 projects with cumulative BPC of Rs. 80,818 crore became operational during FY2019-H1FY2023. Of this, 23 projects with a cumulative BPC of Rs. 27,446 crore (34%) were sold to InvITs and PE players in the last two years.
Vinay Kumar G, Vice President, Corporate Ratings, ICRA, said, “The valuation of HAM projects has sweetened in the recent quarters with hardening in interest rates as annuities in HAM assets are linked with RBI’s bank rate, which is on an upward trajectory. Once a HAM project becomes operational, the risk profile witnesses significant improvement upon completion and track record of 1-2 semi-annuities. The developers are looking at refinancing to reprice their debt or avail top-up loans for future equity commitments.”
About 105 HAM projects with bid cost of Rs. 1.22 lakh crore are expected to become operational in the next two years; About Rs 0.90 lakh crore of debt linked with these projects could be refinanced.
HAM as a model has evolved over the years since its introduction in January 2016. The interest in annuities for HAM projects is sizeable, amounting to around 45 per cent of overall inflows during the concession period. With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs, thereby reducing the interest rate risks to a large extent. Also, the payment milestones were increased from 5 to 10 to improve the cash conversion cycle for developers. Given that the developers are quoting abnormally low O&M bids, NHAI had changed the bid parameter to BPC alone while doing away with the quoting of O&M cost in May 2022. In lieu of this, the bidder would be paid a fixed percentage of BPC as O&M during the operations period.
NBM&CW JANUARY 2023
