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Two L&T Road Projects Default, But There's No Recourse To The Company. Is This The Beginning?

Two road projects that involve L&T have “defaulted” on payments, says ICRA.

L&T Halol Shamlaji Tollway Quasi-Default: Because Of Alternative Road in Gujarat!

The L&T-HSTL, which is a special purpose vehicle built to operate a tolled road between NH8 and SH5 (Vadodara to Halol) in Gujarat, and which has built a massive 173 km four laned highway between Halol and Shamlaji. The project spend 1305 cr. on building the road, and they haven’t been able to recover the money through tolls. (ICRA downgraded to D)

Since the beginning of tolling operations, the traffic volume witnessed in this stretch (in three of the four Toll Plazas) has been significantly lower than the initial estimates, due to presence of a significant alternate route, resulting in lower than anticipated cash accruals. The alternate route was substantially improved by GOG into a competing road subsequent to award of this bid leading to considerable diversion of traffic from the Project stretch.

Incredibly just as we praise the highways of Gujarat and that awesome road network, it appears that such expansion means that project builders like L&T are now hosed because people simply use the alternatives rather than the tolled road!

There is no real default anymore. L&T is not a guarantor to the loan. It is not required to pay for the interest cost, which is supposed to be paid through toll collections. Payments are monthly, it appears. The tollway was supposed to pay Rs. 12 cr. as interest for August, and paid only Rs. 5.4 crore on the due date. L&T then paid up the rest later, and there are no further outstanding amounts. (ICRA Source)

Which means – what is a “Default”, isn’t.

ICRA has though retained the D rating, and says that the company must get some kind of relief from the Gujarat State Road Development Corporation, in the form of a shortfall loan or deferment of revenue share (both of which are in discussion). An attempt to refinance this project now, with a D rating, looks like an uphill task.

However note: L&T is not required to pay the shortfall and is not liable if the company defaults. All lenders can do is take over the road and tollways.

L&T Chennai Tada Tollway Defaults: NHAI Doesn’t Acquire Land

Another project,  this time on a road in Chennai to Tada in Tamil Nadu, defaulted on a loan of over 360 cr. because they don’t have the right of way access to 23% (10km) of the road. They were supposed to make the road stretch six lanes from four. This has been stuck since 2009!

The rating went to D:

The rating revision follows from the recent delays in debt servicing following the dispute with the Authority, NHAI, with regards to termination of the concession; the company has served termination notice to NHAI due to land acquisition related issues and the matter is pending before the Delhi High Court. The land acquisition on the stretch has been long delayed with Right of Way (RoW) for the initial 10 km stretch (23% of overall length) still unavailable. Though the company had earlier undertaken that the remaining project works would be completed once the RoW is provided by NHAI, lack of clarity on escalation has severely constrained the future viability of the project considering that the project was bid based on 2009 prices.

They’ve defaulted on only Rs. 3.9 cr. of interest, because they have technically terminated the contract. Again, L&T has no reason to have to pay – they don’t stand guarantee, and the lenders have no recourse to L&T assets.

This is Big only if it gets Bigger

Yes, two road projects which owe a combined 1400 cr. are technically in default. One isn’t even bad – since L&T has paid up.

But this is a big issue only if it is the start of a huge slide in road construction projects, where things have been stuck for a very long time. The presence of alternate roads – many of which have been made better by states – will have repurcussions on projects like this. Land acquisition issues plague way too many projects and they could also begin their default process.

Assuming that the name is L&T means that L&T stands behind these projects is fraught with error. The actual documentation may be, and in this case, is different. We have seen that earlier – even a government guaranteed bond defaulted! Because the fine print only included a certain amount of guarantee, and the rating agency didn’t consider that when it made their rating assessment.

But, and this is important – L&T has been giving unsecured loans to the Halol project for loan repayment and possibly to the Chennai project as well. These loans could become “bad” – i.e. unrecoverable, and if so, at some point L&T will have to take the hit. L&T has over 280 cr. due from the Halol Project (apart from its equity) and around 41 cr. of equity invested in the Chennai project.

This is likely to be just the beginning; more will come, and if the pressure shifts to State Road Development Organizations or to NHAI, we will see that the government could end up having to bail them out. The worst is still ahead of us, but we should welcome it as it will force resolution rather than lying in limbo all these years. This default may not be a big deal, unless this triggers many more. 

  • Kumar says:

    It’s surprising the Chennai-TADA toll to default. It’s one of the high grossing toll with heavy traffic. Even many feel the toll collected is much a bit on higher side when you see the road maintenance.

  • XYZ says:

    Indeed! Quite pertinent!

  • Biplob says:

    The optimist in me sees the result as:
    1. This would put investible money into railways (badly needed) from roads.
    2. If pressure comes on the govt. it’ll force them to call a joint session to pass decent bankruptcy laws, either than or cull up subsidies; the govt. will probably choose the former.

  • DJ says:

    Actually, in this case, since roads are public goods, its probably ok for the govt to bail out the project. Infrastructure isn’t supposed to be (entirely) in the private sector and PPP models were suggested to share exactly these kinds of risks. There is no bad behavior here and since roads are public goods, it would probably be ok for the govt to figure out some resolution with the private player. Taxpayers shouldn’t mind as long as there are good, usable roads at the end of the day. What we don’t want to end up with is a situation where private players start using influence to prevent development of alternative roads because it would jeopardize their project. Its kind of like that with education (a politician will prevent a private player from building a college in his constituency, because he has his own, etc), hospitals and many other sectors.

    • Yeah, probably. At least this way the road got done completely, and they can do away with the toll. I agree with you in that the government needs to pay for infra (what else are taxes for)
      Out here the actual solutions will be – let the builder default, take over the project, government buys the loan, private player loses his equity (and whatever loans he has given – like L&T has – for making up debt payments) This will scare off private players from ever bidding again, and PPP will be dead.
      If the government rescues the equity of the private player, Subbu swamy will be in supreme court claiming a scam.
      It’s so much fun, this socio capitalist thing we have!

      • DJ says:

        Loan waiver or haircut might be good enough. Equity might not be much anyway and private investment flows would probably not suffer if they get debt backstops (conditional on financial sobriety of the private player). I think private players won’t be scared off if some projects lose equity (if on average projects make some money) and they would still be willing to take the risk. And, this way they still have to do some due diligence and not make completely bad investments…