Karachi, March 15, 2023 (PPI-OT): VIS Credit Rating Company Limited has reaffirmed the entity ratings of ‘A/A-2’ (Single A/A-2) assigned to Ghotki Kandhot Road and Bridge (Private) Limited (GKRBC). The long-term rating of ‘A’ signifies good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy.
The short-term rating of ‘A-2’ indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. VIS has also reaffirmed the preliminary bank loan rating (blr) of ‘AA (blr)’ (Double A (blr)) to GKRBC’s secured bank loan facility planned to be drawn for the construction works on the project. Outlook on the assigned ratings is ‘Stable.’
The previous rating action was announced on November 29, 2021. VIS will review the ratings on finalization of legal document.
GKRBC has been established to develop two sections of the road along with a bridge located at the Ghotki Kandhkot site of the Sindh province. The proposed bridge over the Indus will connect the National Highway (N-5 at Ghotki) to Indus Highway (N-55 at Kandhkot) along with the project facilities. Currently, the distance between Kandhkot and Ghotki via Guddu Barrage, the alternate route, is approximately 151 km.
Post construction of the 34.7 km (approx.) project, the distance between the two cities will be reduced to 42 km, resulting in significant fuel cost and time savings. During the rating review period, due to changes in the design of the project, the completion timeline and total project cost increased; however, all other salient features of the project in terms of guarantees, equity to debt contribution, EPC contractor, mark-up rate, shareholding profile, and construction and operational risk factors remained unchanged.
The assigned ratings incorporate sound profile of sponsors, as shareholding of GKRBC is vested with Sachal Engineering Works (Pvt.) Limited (SEWPL) (53%) and Government of Sindh (GoS) (47%). SEWPL will also act as the EPC contractor. SEWPL has considerable experience and sound track record in executing infrastructure projects, especially toll roads and bridges.
Demand risk, associated with uncertainty in future traffic volumes and toll rates, will not be borne by GKRBC as the company will receive fixed annuity payments from the GoS, which will include an O and M costs component, tax component, debt service component and a fixed Return on Equity (ROE) for the company.
Inclusion of the debt service component in the annuity payments mitigates the financial risk. Moreover, the secured bank loan carries a Provincial Guarantee in favour of the financiers backed by an unconditional and irrevocable debit authority on the GoS Non-Food Account No. 1 maintained with SBP equivalent to 50% of the facility amount.
The debit authority shall continue at all times over the life of the STFF facility. Construction risk in the project is present but partially mitigated due to sound track record of the EPC contractor.
Cost overrun risk is also inherent, but ratings draw comfort from adequate contingency built in the project cost and interest savings accrued over the period due to delay in debt drawdown together with sponsors, including GoS, undertaking to fund the shortfall, if any, in equal sharing. Going forward, achievement of financial close, timely completion of key milestones, and overall project without any further significant cost and time overruns will be the key rating sensitivities.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
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