RATING RATIONALE
07Oct2022
SEW Bellary Highways Ltd.
Brickwork Ratings revises the ratings for the Bank Loan Facilities of Rs. 27.43 Crs. of SEW Bellary Highways Ltd.
Particulars| Facilities** | Amount (Rs.Crs.) | Tenure | Rating# | ||
|---|---|---|---|---|---|
| Previous | Present | Previous (09 Sep 2021) |
Present | ||
| Fund Based | 40.21 | 27.43 | Long Term |
BWR D
Reaffirmation |
BWR BB -
/Stable Upgrade |
| Grand Total | 40.21 | 27.43 | (Rupees Twenty Seven Crores and Forty Three lakhs Only) | ||
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
RATING ACTION / OUTLOOK
Brickwork Ratings (BWR) upgrades the rating for the bank loan facility of Rs. 27.43 Crs of SEW Bellary Highways Limited (SEWBHL or the company) to BWR BB-/Stable from BWR D. The rating draws strength from the project entity's improving financial risk profile marked by improving debt protection metrics, steady revenue visibility given the long term, half-yearly annuity-based concession agreement with Karnataka Road Development Corporation Limited (KRDCL), the escrowing of annuity remittances by KRDCL and existence of a DSRA in line with stipulated minimum level of one quarter's interest and one principal installment. The rating however is constrained by a track record of consistent delays by KRDCL of lengths averaging nearly two months in receipt of annuities, a high-risk debt maturity schedule wherein the debt service dates are a week ahead of the scheduled annuity receipt dates, instances of DSRA being dipped into and the expected continuance of the same in the future. Further, the liquidity is stretched and is characterized by annual cash accruals being barely adequate to cover full debt service amounts, which in FY23 is at risk of further deterioration given the project entity's planned major maintenance cost estimate of Rs. 5.0 Crs for the year and the possibility of a repeat instance of a delayed annuity receipt.
The outlook has been kept stable in view of the project authority's improved timeliness in meeting annuity payments to the project entity over the two preceding dates which leads us to expect that the annuity due in March 2023 would be received by the company in time and expectation of full annuity payment by KRDCL.
KEY RATING DRIVERSCredit Strengths:
-
Presence of Annuity Routing and DSRA :
The company maintains a TRA with the bank and the semi-annuity payments from KRDCL are routed through the escrow account. However, the annuity payments due to the company have not been secured by an LC/BG mechanism. Additionally, the company is also maintaining DSRA of Rs.10.13 Cr in the form of term deposits, which is in line with the stipulated requirement of one half yearly Installment and one quarter's Interest. However, the September payment has been met from the DSRA which has since also been replenished. In all, the company has received 19 annuities till date.
-
Improving financial risk profile :
The company's financial risk profile is strong, marked by improving leverage and debt protection metrics. The tangible net worth of the company was around ~Rs. 16.4 crores as of FY22 (prov.) adjusted for carriageway rights. Between FY18 and FY22, the company reduced its total debt by ~74% to a level of ~Rs. 19.3 crores as on FY22 (prov.). The debt protection metrics are expected to improve further, as the company is not expected to raise any additional debt in FY23.
-
Termination payment protections :
The concession agreement for the project has termination payment protections for the concessionaire which can come in effect for the company regardless of a default on the company's part or the project authority's, as COD has already been attained and the project has moved into its operations period. On account of termination attributable to a company default, the project authority is liable to pay the company an amount equal to the discounted value of remaining future annuity payments at the time of default minus the insurance cover, but only if insurance claims are not paid at that point in time. In the case of termination due to a default on the project authority's part, the project authority is liable to pay the concessionaire an amount equal to the discounted value of remaining future annuity payments. The presence of these payment protections lends comfort to the prospect of the lender being able to recover its dues even in the event of project termination.
-
Mature, operational road asset with a length of under 50 kilometres :
Given that the project has already achieved its COD (Commercial Operations Date), execution risks are no longer expected to emerge. The company is also expected to deliver on its regular operations and maintenance obligations as the asset is expected to have limited complexity given that its overall length is under 50 kilometres.
-
Weak sponsor :
The ultimate holding company viz. SEW Infrastructure Ltd (SIL) has been facing liquidity problems for the past many years. No financial support is expected from SIL in future.
-
Precedence of debt service dates before annuity receipt dates compels DSRA dependence :
The company has a bi-annual debt service obligation as well as a bi-annual annuity receipt as per the concession agreement, with the dates for both events scheduled in the same months of the year viz. March and September. However, while the company is required to service its debt on the first of the month, the company is scheduled to receive the annuity only on the eighth of the month. This leads the company to ensure that there is an adequate balance in its escrow account prior to the debt service dates. In September 2022, the company had to utilize its DSRA balance to meet its debt service requirement, which it nonetheless replenished following receipt of the annuity payment for that month. Timeliness of annuity payments can hence become a strong determinant of whether the DSRA balance is maintained at all times.
-
Expected marginal unencumbered liquidity by the end of FY23 after required major maintenance operations :
The company has estimated that Rs. 5 Crs. of expenses would be incurred towards major maintenance operations, each in FY23 and FY24. A special O&M contractor/agency would be appointed/engaged prior to the intended period of major maintenance operations. This would be distinct from regular O&M operations (which are currently being undertaken by a separate agency/contractor) as it would require larger-scale/specialized equipment. The actual required start of the period of these major maintenance operations would be notified in advance by KRDCL. Given that the company had a cash and cash balance of Rs. 16.06 Crs as of March 31 2022 and a current DSRA balance of ~Rs. 10.13 Crs, it is expected that the company would be able to complete its planned major maintenance operations in FY23 but at the cost of further depleted unencumbered liquidity by the end of FY23.
For arriving at its ratings, BWR has considered the standalone financials of the company.
RATING SENSITIVITIES
Going forward the ability of the company to continue receiving annuities from KRDCL on time and in full and ensure timely debt servicing shall remain key rating sensitivities.
Positive: The rating could be upgraded in case of an improvement in the track record of timely receipt of the annuity payments from KRDCL and in full. Improvement in the overall financial profile, including reduced dependence on DSRA for debt servicing, of the ultimate holding company and timely completion of major maintenance within budgeted costs and time would also be credit positive factors for the rating.
Negative: Significant delay in receipt of annuity inflow from KRDCL, deduction of annuity, inability of company to timely replenish DSRA and non-creation of a major maintenance reserve will be credit negative.
LIQUIDITY INDICATORS - Stretched
BWR expects SEW Bellary Highways' liquidity to be stretched through FY23. Major sources of cash include the company's cash and cash equivalents balance of Rs. 16.06 Crs as of FY22 (prov.) and expected cash accruals in the range of Rs. 14.0 - Rs. 14.5 Crs, in FY23, while the major requirements of cash would be the debt service requirements (inclusive of both principal and interest payments) in the range of Rs. 14.5 Crs. to Rs. 15.0 Crs in FY23 and major maintenance operations costs of around Rs. 10 Crs, by FY 24, of which it is expected that the company would incur Rs. 5 Crs. in FY23. The company has already made Rs. 6.05 Crs of principal payments in the month of September 2022. The company is maintaining term deposits of `Rs. 10.13 Crs as its DSRA balance which is in line with stipulated requirement of an amount equivalent to one half-yearly principal payment and one quarter's interest. The company's ultimate parent company SEW Infrastructure Limited is currently a BWR D-rated entity and is not expected to provide any liquidity support in the near to medium term.
ABOUT THE ENTITYSEW Bellary Highways Ltd (SBHL), Hyderabad, is a special purpose vehicle incorporated in August 2010 to undertake the improvement of a 25.67 km stretch of state highway 132 from Bellary in Karnataka to the Andhra Pradesh border, including the four- laning of 8.5km and two- laning of the remaining 17.17km. SBHL has executed this project under a 15-year concession from Karnataka Road Development Corporation (KRDC).
The said project is an annuity-based project under which KRDC, owned by GoK (Government of Karnataka), will make semi-annual payments of Rs. 12.60 Crs to the company for a period of fifteen years. The highway has been operational since March 2013.
SBHL is a subsidiary of SEW Transportation Networks Ltd which in turn is a wholly owned subsidiary of SEW Infrastructure Ltd
KEY FINANCIAL INDICATORS (Standalone)| Key Parameters | Units |
FY 20-21 (Audited) |
FY 19-20 (Audited) |
|---|---|---|---|
| Operating Revenue | Rs.Crs. | 25.90 | 25.27 |
| EBITDA | Rs.Crs. | 17.16 | 16.75 |
| PAT | Rs.Crs. | -1.85 | -5.07 |
| Tangible Net Worth | Rs.Crs. | -32.95 | -43.78 |
| Total Debt/TNW | Times | -1.30 | -1.13 |
| Current Ratio | Times | 1.11 | 1.25 |
The terms of sanction include standard covenants normally stipulated for bank loan facilities. The company maintains a TRA with the Bank and the semi-annuity payments from KRDC (Karnataka Road Development Corporation) are routed through the Escrow account. The lenders have also stipulated a DSRA for 1 half yearly installment payment + 3 months interest
STATUS OF NON-COOPERATION WITH PREVIOUS CRA
NA
RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)| Facilities | Current Rating (2022) | 2021 | 2020 | 2019 | |||||
|---|---|---|---|---|---|---|---|---|---|
| Type | Tenure | Amount (Rs.Crs.) |
Rating | Date | Rating | Date | Rating | Date | Rating |
| Fund Based | LT | 27.43 |
BWR BB-/Stable
(Upgrade) |
09Sep2021 |
BWR D
(Reaffirmation) |
26Mar2020 |
BWR C
(Reaffirmation/ISSUER NOT COOPERATING*) |
07Feb2019 |
BWR C
(Reaffirmation) |
| 0.00 |
NA
|
NA |
NA
|
09Jun2020 |
BWR D
(Downgrade) |
NA |
NA
|
||
| Grand Total | 27.43 | (Rupees Twenty Seven Crores and Forty Three lakhs Only) | |||||||
BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.
Hyperlink/Reference to applicable Criteria- General Criteria
- Approach to Financial Ratios
- Road-BOT(Annuity) Projects
- Infrastructure Sector
- Default Recognition and Default Curing Period
| Analytical Contacts | |
|---|---|
|
Sourav Sen Ratings Analyst souravsen@brickworkratings.com |
Chintan Dilip Lakhani Director- Ratings chintan.l@brickworkratings.com |
| 1-860-425-2742 | media@brickworkratings.com | |
| SL.No. | Name of the Bank/Lender | Type Of Facilities | Long Term(Rs.Crs.) | Short Term(Rs.Crs.) | Total(Rs.Crs.) | |
|---|---|---|---|---|---|---|
| 1 | State Bank Of India (SBI) | Term LoanOut-standing | 27.43 | _ | 27.43 | |
| Total | 27.43 | 0.00 | 27.43 | |||
| TOTAL (Rupees Twenty Seven Crores and Forty Three lakhs Only) | ||||||
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