ARCs to see recovery rates for stressed road projects rise to 65% in FY25: CRISIL

Asset reconstruction companies (ARCs) will see their cumulative recovery rate from security receipts (SRs) of stressed road projects rise 700-1,000 basis points (bps) this fiscal to 60-65 per cent after doubling to 50-55% last fiscal, according to CRISIL Ratings.

The cumulative recovery rate (cumulative gross recoveries / cumulative SRs) issued for the CRISIL Ratings SR portfolio of stressed road assets rose to 50-55 per cent in FY24 from 21 per cent in FY23.

The agency observed that the rise in the cumulative recovery rate will be driven by faster completion or descoping of pending construction, resulting in the start of annuities by the National Highways Authority of India (NHAI), thereby enabling quicker resolutions or restructuring of debt. Further, a healthy increase in toll collections should also support recoveries.

An analysis of the security receipts (SRs) rated by CRISIL Ratings, covering 2,500 lane km of underlying stressed road projects with total principal debt of Rs.6,000 crore (60 per cent of road assets with ARCs) indicates as much. These encompass projects under build operate and transfer model (toll assets) and hybrid annuity model under NHAI which were acquired at average haircut of 40 per cent by ARCs.

Most of the projects in the CRISIL Ratings SR portfolio became stressed between 2017 and 2019 due to delays in land acquisition and obtaining Right of Way (RoW) by the government and/or lower toll collection than initially estimated, per the agency’s analysis. Of these, half have seen construction completion, while descoping of pending RoW was done for the rest of the assets.

CRISIL Rating’s analysis of these projects now reveals that stabilising annuity payments due to faster completion of pending work or descoping of pending RoW post-acquisition by ARCs have improved liquidity for them with annuity payments adequate for servicing of restructured debt.

Furthermore, traffic growth for toll assets is likely to hold steady at 4-6 per cent this fiscal with healthy macroeconomic markers (growth in industrial capex, rapid urbanisation, rising exports and tourism). This should lead to a growth of 7-9 per cent in toll revenues this fiscal which will support the recoveries from such roads, per the agency.

Sushant Sarode, Director, CRISIL Ratings, “ARCs will benefit from stressed road asset recoveries with healthy increase in toll collection and steady annuity payments from NHAI post completion of balance construction/descoping.

“The improved liquidity and stabilised cash flows are expected to drive faster debt reduction using internal accrual, or refinancing, thus raising recovery rates for ARCs. As a result, we expect outstanding SRs for these assets to be recovered over the next 3-4 years — within the stipulated timelines of recovery for ARCs.”

The agency noted that performance improvement is also reflected in the debt to toll (outstanding restructured debt/ annual toll collection) ratio, which improved from 8.1 to 6 times, and the debt to annuity (outstanding restructured debt/ pending annuities) ratio, which strengthened from 0.8 to 0.6 times within 1-2 years of restructuring for the rated stressed road assets.

For non-operational assets or operational assets with claims under dispute, other resolution mechanisms like termination payouts with better predictive capability as well as dispute settlement through fast-tracked conciliation and arbitration for claims, will support recovery in the medium term.

CRISIL Ratings noted that over time, the landscape for recoveries in stressed road assets has benefitted from the key role played by the NHAI in supporting recoveries through termination payouts (covers debt due and adjusted equity).

For instance, a separate study of four terminated road projects with outstanding debt of ₹4,675 crore indicated an average recovery of 65-70 per cent of the debt, realised in 2-3 years from the termination date.

Tanvi Fifadra, Team Leader, CRISIL Ratings, said: “The settlement of claims under conciliation worth ₹48,180 crore across 189 cases by NHAI during fiscals 2018-2023 at an average rate of 34 per cent has averted delays due to prolonged litigations. The continued focus of the NHAI on settling claims for stressed road projects can, over the near to medium term, facilitate recovery of ₹5,300 crore of claims in our portfolio and revive these projects.”