>Indian Infrastructure Outlook 2010 (FITCH RATINGS)

Overview
Fitch Ratings has a stable outlook for 2010 on its portfolio of rated infrastructure project debt; this represents an array of project asset classes, including roads, airport, power, water and rail. The ratings, especially for projects under construction, are at low levels. Construction delays continue to be a major irritant, with a number of factors outside the control of project sponsors (including land acquisition and regulatory approvals) negatively impacting timely completion.

In the absence of rigorous adherence to contractual provisions, project companies and sponsors have had to take on the burden of additional costs, either through the drawdown of available cash, the raising of equity, or the issuance of debt. Governmental concession‐granting authorities have also seemed willing to extend the schedule for project delivery. Banks, recognising these systemic constraints, and responding to the requests of project companies and concession‐granting authorities, seem willing to reschedule project loans, chiefly by postponing commencement of principal moratorium. This spirit of accommodation/adjustment‐ or ‘jugaad’ ‐ adopted by various project counterparties (including sponsors, bankers, contractors and the government) has prevented large‐scale rating downgrades. Nevertheless, the capacity for ‘jugaad’ is limited and in certain cases, projects remain vulnerable to specific event risks; as such, there could be selective ratings downgrades in 2010.

Fitch‐rated operating projects appear to have weathered the economic slow down without deterioration in credit profiles (beyond the initial stress scenarios). The pick‐up in user demand and revenue growth rates witnessed in recent months has contributed to Fitch’s stable outlook. The economic crisis dampened usage growth rates in the transportation sector, and some projects are struggling to achieve base case forecasts, but other operating projects are displaying resilience. Consequently, there may be select ratings upgrades for the Fitch‐rated debt of certain operating projects. Outside of Fitch’s rated universe, the agency has a largely stable outlook on the Indian infrastructure sector as a whole; this stems from the recovery following the economic slowdown witnessed in the second half in FY09. This recovery has been aided primarily by three factors: (a) renewed urgency displayed by the government to bid out new projects; (b) demand pick‐up on the back of higher GDP growth rates; and (c) favourable financial environment, including a buoyant equity market and banks awash with liquidity. All of these factors have contributed to a return of an appetite for risk on the part of the private sector.

Although achieving financial closure for greenfield projects has become a lot easier and quicker ‐ due to abundant bank liquidity in a favourable economic environment ‐ projects continue to be burdened with high interest rates, heavy gearing and medium‐term amortising loan tenors; all of which contribute to high risk profiles for such projects.

Project developers appear to be pricing some of the risk elements of past projects into their bids and return expectations for new road projects; this is a consequence of the National Highways Authority of India’ s (NHAI) inability to complete timely right of way (RoW) acquisitions or to permit partial tolling. Developers are also seeking to employ creative methods of overcoming public counterparty delays, including financing higher ROW upfront purchase prices and then filing for a concession extension after project delivery (COD).

To read the full report: INDIAN INFRASTRUCTURE