Sunday, 20 January 2019

IRB ties in record BOT road deal

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  • Ahmedabad-Vadodara road link
  • Diagram 1 - Project structure
  • Diagram 2 - Financing structure
  • Diagram 3 - Project life

IRB Infrastructure Developers Ltd has achieved financial close with a debt tie-up of Rs33bn for its Rs48.8bn BOT project of six-laning the Ahmedabad Vadodara section of NH8 and the improvement to the existing Ahmedabad Vadodara Expressway. By Rohin Agarwal and Nikhil Maniar, senior associates, Bajaj Consultants Pvt Ltd

To view the digital edition of this report please click here.

The total debt of Rs33bn was structured by Bajaj Consultants Pvt Ltd, which was the sole financial adviser for this transaction. This is the largest debt syndicated so far for a toll-based BOT highway project in India. The scope and the structure of the deal present a vital insight into the emerging trends in the Indian infrastructure space.

IRB Infrastructure Developers is one of the largest build, operate and transfer (BOT) toll road operators in India, with 16 BOT projects in the country and 6,722 lane kilometres under its belt. Bajaj Consultants has been actively involved in providing financial advisory for the past 25 years in India with a focus on infrastructure and has arranged debt in excess of Rs100bn in the past three years for large infra groups.


Project brief

In April 2011, IRB bagged the first ultra mega project in India. This envisages the six-laning of the Ahmedabad to Vadodara section of NH8 from Km6.4 to Km108.7 and the improvement of the existing Ahmedabad Vadodara Expressway (NE1) from Km0.00 to Km93.302 in the State of Gujarat under NHDP Phase V on a design, build, finance, operate and toll basis. This toll road forms a part of the Golden Quadrilateral (GQ) project of the National Highway Authorities India (NHAI).

The concession awarded to the company is for a period of 25 years, which includes a construction period of three years. The section of NH8 between Ahmedabad and Vadodara is currently a two-lane facility. Expressway NE1 is a four-lane facility that is already being tolled by NHAI through tolling agencies. The tolling on NE1 would be taken over by IRB from the appointed date, ie, immediately on takeover of the Highway by IRB, while that on NH8 would commence after the construction period of three years.

Project structure

The project structure in brief is given in the diagram below.


Financing structure

As the project debt was proposed to be funded through consortium banking (typical of road projects), Bajaj Consultants approached IDFC to act as the lead member of the proposed banking consortium and conduct the appraisal of the project. IDFC, in consultation with the borrower and the arrangers, appointed Lea Associates South Asia Pvt Ltd (LASA) as the lenders’ engineer to estimate the project cost and traffic count on the project highway.

Based on the report submitted by LASA, Bajaj Consultants formulated the financial model and the project information memorandum to be circulated to all the lenders. The project cost was appraised at Rs48.8bn, of which Rs15.8bn is being funded by the sponsor’s contribution (in the form of equity and subdebt) and Rs33bn of debt (a rupee term loan with an external commercial borrowing sub-limit).


The funding structure was finalised with a debt/equity ratio of 2.09:1 and the rupee term loan with a door-to-door loan tenor of 18 years, to the comfort of the lenders. One of the main challenges of the project was to bring down the interest rate. Domestic interest rates, as opposed to international ones, were extremely high at about 12% to 13%. In order to reduce the interest rate, Bajaj Consultants structured the means of finance such that one-third of the overall debt was to be funded by way of foreign currency loans under the external commercial borrowings (ECB) window. ECB sub-limits were negotiated to be borrowed at an all-inclusive cost of 425bp to 500bp over Libor. This way the average interest cost was brought down to 10.5% on a blended basis.

While IRB’s ability to raise funds for the debt was unquestionable, there seemed to be concerns on the project due to the high premium payable to NHAI resulting in negative cashflows in the initial six years of the project. The cash shortfall in the initial six years of operation after construction, which was estimated at Rs6bn was proposed to be funded by the promoter funding over and above the sponsor contribution of Rs15.8bn.

Bajaj Consultants, based on the information provided by IRB, prepared the business plan and future cashflow estimates for the promoter – ie, IRB Infrastructure Developers Ltd - on a consolidated level to estimate if IRB could meet its commitment through its internal accruals. The estimates were prepared commencing from FY 2012 to FY 2021, which covers the base year, the initial construction period of three years and the first six years of operation during which promoter funding is needed to cover negative cashflows. The projections to the comfort of the lenders showed that IRB could comfortably meet its commitments for the construction and operational periods.


With the commercials agreed upon, IDFC sanctioned Rs10bn as a rupee term loan in November 2011. Bajaj Consultants had ensured that the in-principle sanctions were already in place from other banks for the entire balance debt. The team at Bajaj Consultants then initiated the process for final sanctions with various banks.

Key challenges

Some of the key challenges in tying up the debt and achieving financial closure for the project were as follows.

1 – Project cost: A common apprehension by lenders was that the project cost seemed high compared with that of other road projects. A justification was offered that while other projects envisaged only a capacity augmentation from four lanes to six lanes, this project involved the building of a new six-lane carriageway as the existing two-lane road was not in good condition. Moreover, the structures had added to the cost. However, the per kilometre cost was in line with that of other road projects  The cost had already been vetted and confirmed by LASA, the lenders’ engineer.

2 – High premium, negative project cash accruals and low DSCR in the initial year: There was extensive media coverage and industry news reports that road projects were being bid very aggressively, with developers offering high premiums to NHAI. It was more pronounced for this project as IRB bid a premium of Rs3.09bn payable to NHAI from the first year of the concession period against Madhucon Projects (H2 bidder), which had quoted Rs1.92bn. Also, the projections showed that the project would have negative cashflows during the first six years of operation after construction. This had necessitated the promoter to infuse additional funds as an unsecured loan.

Lenders also expressed concern regarding the debt coverage ratios. It was explained that the long concession period of 25 years offered scope for long-term stable returns despite negative cashflows in initial years. The project faces a shortfall in cash accruals initially not only on account of the high premium, but also due to higher interest cost in the initial years. The toll revenues surge in the later years to ensure reasonable IRRs and a comfortable average DSCR.

To provide further comfort to the lenders, a corporate guarantee from the sponsor was offered to fund the shortfall in cashflows in the initial years. This was a unique project structuring, wherein lenders accepted the negative project cashflows in the initial years of the project to be funded by a sponsor contribution to be brought in at a later date in the respective years due to strong sponsor support and background.

3 – Sensitivity of traffic shift: The concession agreement is such that the toll rates on NH8 would be 72% higher than that on NE1. Considering that these are parallel routes between the same two cities, ie Ahmedabad and Vadodara, the project faces a risk of major traffic movement from NH8 to NE1. This could adversely impact the toll revenues generated from the project.

From past experience on the Mumbai Pune project of IRB, which has a similar concession, it has been an established that the tendency of users to shift when offered a better facility is low. In the case of the Mumbai Pune Expressway, even though the toll rates on Expressway (six-laned) are higher than that of NH4 (four-laned) by around 60%, the users still prefer the expressway, which is a better facility.

It is understood that NH8 after six-laning would be a far superior facility compared with the existing expressway NE1. As such, the risk of traffic shift would be low considering that NH8 would be a better facility on completion. However, this eventuality of probable shift in the traffic was also incorporated. A reasonable traffic shift was factored into the projections by Bajaj Consultants at the time of financial modelling in the base case scenario, though looking into the past practical experience of IRB in the case of the Mumbai Pune Corridor the probability was considered to be low.

4 – Liquidity crunch in domestic credit market and industry outlook: Reserve Bank of India had adopted a hawkish stance on inflation and had been using prudent monetary policy tools to tighten the liquidity in the market. This had caused the banks to become selective in clearing proposals for loans. Moreover, the banks were becoming increasingly cautious on lending to the infrastructure sector on account of rising NPAs and news of aggressive bidding in roads.

Many banks had reached their prudential limits for lending to the road sector. Many had various restrictions on yields, tenors, group exposure, average maturity, sector exposure, etc. Through their expertise in debt syndication and project financing, the team at Bajaj Consultants had foreseen this eventuality and accordingly structured their approach in selection of the prospective lenders to the project that could commit such long-tenor loans to the project.

5 – Unique structuring of ECB and the rupee term loan: The principle limitation of availing an ECB for a road project is due to unavailability of long-tenor ECB funds. The tenor is required to be restricted to around seven to eight years, whereas the project requires funding of long tenors of 17 to 18 years. As a result, the ECB repayment at the end of seven to eight years has to be made out through the rupee term loan as the project cashflows do not permit repayment of the shorter duration ECB.

This difficulty of taking out the ECB lender at the end of the ECB loan tenor was overcome by making the ECB a sub-limit of the RTL. The structure is such that ECB of US$225m along with the RTL of Rs21.75bn would be drawn during the construction period. The remaining Rs11.25bn of the RTL facility would be drawn at the end of the ECB tenor to repay the then outstanding ECB. While some of the private banks are offering similar products, the structure was unique and untried by the majority of the PSU banks.

Overcoming the barriers and apprehensions, the team at Bajaj Consultants was successful in getting sanctions for the ECB-RTL facility from ICICI Bank, Union Bank, Punjab National Bank and Indian Overseas Bank. Further, the rupee term loan was structured across 18 years. This was a first for most of the lenders as term loans to road projects are typically structured over 15–16 years. Final commitments from lenders were to the tune of Rs50bn as against the proposed borrowing of Rs33bn. Such oversubscription and demand is a rare sight in infrastructure projects.

The consortium was finalised and the project debt was closed among eight lenders. Typically for such a large syndicated debt for infrastructure projects, the number of lenders generally varies from 12 to 20. Considering the consortium of eight lenders for debt that included rupee as well as ECB facilities, the documentation was multi-faceted and complex. With the concurrence of the lenders and NHAI, financial close was achieved in February 2012, which marked the successful completion of the largest debt tie-up for a toll-based project in the highway sector in India so far.


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