Bidders for toll-operate-transfer (TOT) projects may find it difficult to tie up debt, as the debt tenor in India is typically 10-15 years, according to India Ratings and Research.

Such projects pose a huge refinancing risk, as the initial concession period is 30 years. With long concession period, the initial estimated concession value is bulky, requiring large debt and thus large interest payments, which would be a burden on the bidder during initial years until the project achieves significant ramp up in revenues, the rating firm observed in its analytical report.

It believes that a reduction in the concession period by five-seven years would lower the quantum of interest payments during the initial years. It would help the concessionaire mitigate refinancing risk to a certain extent.

The predictability of cash flows for a horizon of 30 years is a daunting task, as toll revenues and operation and maintenance expenses may vary depending upon economy, Wholesale Price Index and Consumer Price Index.

The investors and the lenders would have to be a little cautious on this model for the first bundle of projects, so as to structure the debt in such a way that in the initial years the return on equity is higher before debt payment.

The bids would be more competitive and with less variance since six out of nine assets to be bid under the TOT model are part of the Golden Quadrilateral and other three are in industrial clusters.

More than 50 per cent of assets have an average vintage of 10 years, enabling bidders to bid based on actual toll collections, routine operations and major maintenance expenses.

Features such as exclusivity, augmentation, fair termination payments and extension/reduction up to 10 years/five years in concession period in case of lower/higher traffic growth rates, respectively, make the TOT model attractive. Pooling of cash flows might bolster the credit strength of the TOT assets, the agency said.

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