MUMBAI: Asset reconstruction companies (ARCs) are set to see a strong step-up in cumulative recovery rates for stressed operational road projects with recovery rates doubling to 120% by next fiscal over fiscal 2025 levels on the back of healthy annuities and toll collections. This will ride on timely annuity payments by the National Highways Authority, healthy toll collections and resolutions through the bankruptcy process, Crisil Ratings said in a report Wednesday.
The bankruptcy process has aided resolution of 11 road projects cumulatively until fiscal 2025, with an average recovery of 60% on admitted claims worth Rs 6,000 crore. Further, having gained substantial capabilities in the road sector, ARCs which have been struggling after the IBC got traction, are also eyeing acquisition of terminated assets banking on collaborative efforts by multiple stakeholders to pave the way for timely recoveries, said the report, which is based on the 2,500 lane km of stressed operational road projects, with total security receipts issued of Rs 3,200 crore and 1,000 lane km of terminated road projects with total SRs issued of Rs 3,000 crore.
Majority of operational road projects, primarily under the build-operate-transfer model, faced stress between fiscals 2017 and 2019 due to construction delays and cost overruns owing to difficulties in land acquisition and getting the right of way. These assets were consequently acquired by ARCs between 2019 and 2022 with around 44% haircuts on principal outstanding debt.With traffic growing at an annual rate of 9% between fiscals 2022 and 2025, descoping of pending right of way and completion of delayed construction, these projects became viable at reduced debt levels.
Further, timely annuity payments and healthy toll collections have improved the liquidity profile of these assets.According to Mohit Makhija, a senior director with Crisil Ratings, prudent valuation at the time of acquisition by ARCs combined with healthy toll collections and stable annuity payments from NHAI is enhancing the attractiveness of operational road assets for refinance and takeover by stronger sponsors through the bankruptcy process.
This in turn is accelerating recoveries for ARCs by 12-18 months compared to earlier estimates, thereby doubling the cumulative recovery rate to above 120% by fiscal 2027 for our rated operational assets. Having seen successful turnaround in operational assets and gaining significant sectoral understanding, ARCs are also eyeing terminated road assets to augment their acquisition pipeline.
Unlike operational road assets that benefit from ongoing toll and annuities, recovery in terminated road assets hinges on legal mechanisms such as conciliation with authorities and arbitration, and their successful and timely implementation, he said. Usually, developers opt for conciliation with the NHAI for claim settlements.
NHAI’s conciliation mechanism resolved claims worth Rs 35,000 crore between fiscals 2022 and 2024 as against Rs 24,000 crore between fiscals 2019 and 2021, underscoring its significance in the recovery landscape.
According to Tanvi Fifadra, an associate director with Crisil Ratings, the resolution of outstanding claims worth around Rs 40,000 crore is contingent on the collaborative efforts of ARCs, NHAI, and developers.A concerted approach, including the right sizing of debt at the time of acquisition by ARCs, improvement in the pace of conciliation between the NHAI and developers coupled with timely realization of arbitration awards, can be enablers for resurgence of recovery for these terminated assets.