Toll Roads Securitisation in India

Toll road securitisation, as an alternative means of infrastructure financing, is gradually gathering momentum. Securitisation could be a panacea to the nation´s highly capital deficit sector and its growing requirement for long-term funding.

Road developers have, in quest of alternative means of infrastructure finance, left a lucrative option unexplored. Toll roads make a good asset to securitise provided they have a healthy operating track record and demonstrate financial sustainability. Toll road securitisation, as an alternative means of infrastructure financing, is gradually gathering momentum. Securitisation could be a panacea to the nation´s highly capital deficit sector and its growing requirement for long-term funding. The 12th Five-Year Plan (2012-2017) envisaged a Rs 60 trillion investment requirement in infrastructure with Rs 5.7 trillion going towards roads. The severe dearth of funds cannot be met by the government with its public debt standing at a staggering 82 per cent of GDP or with assistance from international organisations such as the World Bank and Asian Development Bank alone. India´s blossoming trade has been putting immense pressure on the incompetent infrastructure outlay, making it difficult to meet the rising demand. Though the sector is fraught with several risks which demand immediate attention, we cannot underplay the menace of the severe underinvestment and funding gap that has been persisting. Currently, commercial bank lending is the most widely prevalent form of infrastructure funding in India, with over half of the total funds flowing in from bank credit. As of February 2015, the total deployment of gross bank credit in the road sector stands at Rs 1668.23 billion, 384 per cent up from 2008. Infrastructure sector was identified by the Reserve Bank of India in 2013 as one of the five sectors with a high level of stressed advances. The share of infrastructure sector in total stressed advances of Scheduled Commercial Banks stood at 30.7 per cent in June 2014. The banks have demonstrated an indefinite appetite towards infrastructure sector which is certainly a threat.

The high exposure to the sector has made it imperative to deleverage and calls for alternative sources of financing for infrastructure. Commercial borrowings entail asset-liability mismatches since infrastructure projects have a long gestation period and require long-term funding, while bank deposits are short-term in nature.

Securitisation will help bridge the funding gap to a large extent. Road projects have multiple levels of risk ingrained in them. The risks associated with pre-commissioning stage can be mitigated by an appropriate contractual framework. The role of bank credit is more preferred in the construction phase, mainly because most projects need a gradual disbursement of funds and the fact that restructuring a loan is easier by way of negotiations, makes it an economically viable option.

In the post-commissioning stage however, the project risk is superimposed by credit risk when the project starts generating cash flow.

If the toll collection and traffic performance meet expectations, securitisation would be the right button to push in the post-commissioning stage. It will not only fetch a lower cost of debt but will also transfer risk from issuers to investors. Securitisation offers banks some diversification to their risk profile, making it a desirable option. However, most concessionaires in India are still looking askance at securitisation as a viable option post commissioning.

Although there have been very few cases of toll road securitisation in India, empirical evidence suggests that it has not been the only country to deliberate over the process. Japan spent a great deal of time in legal research before taking a call, though their decision was well received by investors. China, too, ventured into the securitisation of toll receivables in 1996 with the Zhuhai Highway Toll receivables being securitised. Later in 2008, China Bank Regulatory Commission´s introduced a new set of approvals which facilitated the development of the securitisation market.

From a credit rating standpoint, securitisation is a credit positive. However, it is imperative to assess securitised toll roads on a case by case basis owing to their unique credit profile. While arriving at a credit opinion for securitised toll roads, matured assets with a strong credit profile and a healthy operational history that demonstrate a strong ability to repay their obligations without additional financial support from the sponsor company have the potential to qualify in the investment grade. Other key considerations include the presence of alternative routes, traffic patronage, location, political climate etc. Although the inherent risk related to tolling remains, the credit rating will be primarily based on the expected credit quality of cash flow.

This article has been authored by Kaushalya Narendran (Research Analyst – Infrastructure), India Ratings and Research. The views expressed by author are personal