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• Fitch Ratings has come out with its research report on Indian infrastructure projects.Fitch Ratings’ 2012 outlook for Indian infrastructure projects is negative overall; the outlook for each sub-sector is shown in the table “Summary of Outlooks”. Fitch foresees a further deterioration in a variety of already prominent credit risks. Fitch expects negative rating actions to dominate in 2012 as risks in various sectors add to pressure on vulnerable credits, with power more exposed than transport projects. However, the low rating levels already incorporate some of the risks, and may provide some cushion.
• Ratings Under Pressure: The credit quality of power projects, airports and toll roads will come under stress in 2012. Although the sector prospects appear good in terms of fundamental demand for energy and transportation, the projects themselves are exposed to a wide variety of risks, which when combined with weak financial structures usually result in low ratings. A range of sector-specific issues and macro-economic factors with varying degrees of impact on different assets are likely to combine to negatively affect credit profiles, beyond levels previously incorporated into Fitch’s stress scenarios at current rating levels. This could lead to downgrades or revisions of Outlooks to Negative of select projects.
• Fuel Scarcity, Weak Counterparties: The power project subsector is most exposed to fuel shortages and low credit quality among customers. Many projects approaching commercial operations date (COD) could be stranded due to lack of fuel. Deteriorating finances among state-owned off-taker utilities will pose greater risks for projects with high generation costs.
• Toll Roads’ Slowdown Exposure: Toll roads that enter the ramp-up phase in a prolonged slowdown could be negatively affected, as in the 2008-2009 global financial crisis, when GDP growth was still 7%. Because most projects suffer from poor initial demand forecasts, external shocks tend to magnify traffic risk. Roads dependent on international trade such as port connections, or serving industries catering to export markets could suffer from lower patronage.
• Recession Risk for Airports: Declining global economic activity and a potential recession in developed economies could adversely affect airport traffic – both passenger numbers and cargo volumes, and affect non-aeronautical revenue streams such as real estate. These factors, coupled with high oil prices, capex over-runs, airlines’ weak financial position and regulatory uncertainty on tariff setting, mean airports will remain susceptible to global economic factors.
• High Interest Rates Risk: Most projects are bank funded, with floating rates. Interest rates have risen sharply – by 150bp-450bp – since financial closure. The increased cost is beginning to affect projects structured with thin financial margins. If rates remain high, weaker projects’ ability to cover debt service from project cash flows without sponsor support will be impaired.

Impact of Inflation

• High inflation has pushed up construction capex and operations and maintenance (O&M) costs. But most projects have some protection, either through fixed-price engineering, procurement and construction (EPC) and O&M contracts or sponsor undertakings to fund escalation. Nevertheless, high inflation and interest rates can also affect counterparty credit quality or performance of the contractors. As most road concessions have annual rate increases linked to the inflation index, high inflation is partially offsetting the negative impact on revenue of significant traffic under-performance.

Biomass Power

• A more than doubling of the prices of biomass fuel, coupled with uncertainties on the supply front – caused by the unorganised nature of suppliers and unpredictable climatic conditions – have sharply dented the economics of biomass projects. Without sponsor support, these projects are faced with the prospect of loan restructuring. Most biomass projects have PPAs with state government utilities that contract to purchase power at fixed tariffs. The tariffs were set when the price of biomass fuel was very low. Unless government policy is amended to allow PPAs to be renegotiated to reflect the recent sharp rise in fuel costs, the long-term viability of biomass projects will be threatened. Without concrete policy intervention, Fitch expects further ratings downgrades in this subsector in 2012.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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