JCR-VIS assigns initial Entity Rating to Shajar Roads Limited

Karachi, January 04, 2018 (PPI-OT):JCR-VIS Credit Rating Company Limited has assigned initial Entity Rating of ‘A/A-2’ (Single A/A-Two) to Shajar Roads Limited (SRL). Outlook on the assigned ratings is ‘Stable’. SRL is a public unlisted company established to undertake dualization and oversee management and maintenance of existing 43km Sheikhupura – Gujranwala Road (SGR). The company was incorporated by a consortium of infrastructure development companies, namely Habib Construction Services (HCS), Niaz Muhammad Khan and Brothers (NKB) and Deokjae Construction Company Pakistan (DJP). SRL has entered into a concession agreement with the Government of Punjab (GoPb) for a period of 25 years in this regard.

The SGR project will be established under the Public Private Partnership (PPP) regime, with one of the sponsors, HCS, responsible for the construction of the road. Management expects to achieve the financial close by-end Jan 2018 and the projected timeframe of road construction is 1 year. Total cost of the project is approximately Rs. 5.8b, which will financed through a mix of debt (60%) and equity (40%).

The assigned ratings incorporate sound financial profile of the sponsors, their experience in infrastructure projects, presence of sub-sovereign concession agreement, and are supported by a structured debt service mechanism in place, in the form of an escrow account, to facilitate timely debt repayments. Debt Service Coverage Ratio (DSCR) is expected to remain at adequate level during the debt repayment period and leverage indicators are expected to improve over time on the back of debt repayment and increase in total equity. Moreover, SRL will maintain a Debt Service Reserve Account (DSRA) equal to two peak instalments at all times.

As per the concession agreement, demand risk pertaining to lower than projected traffic is borne by SRL. However, ratings derive comfort from the projected traffic volumes being in line with the data provided by traffic survey study conducted by the Communication and Works department of GoPb; the same are also conservative as the survey does not take into account the projected increase in traffic after dualization of the road. Moreover, no competing or alternative road exists within a radius of 10km of the route, and the government will compensate SRL for the loss in revenues in case any alternate or competing route is constructed in future. Keeping in view all the aforementioned factors, projected traffic volumes are considered sustainable.

The project entails construction risk and SRL is liable to pay liquidated damages to GoPb in case of any delay beyond substantial completion date. However, this risk is partly mitigated by undertaking provided by the EPC contractor to bear the liquidated damages in case of delay in project. Moreover, sound profile and operational history of EPC contractor also provides comfort in this regard. We understand that adequate contingent costs have been incorporated in the financial model to address cost overrun risk.

For more information, contact:
JCR-VIS Credit Rating Company Limited
VIS House, 128/C,
25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: sobia@jcrvis.com.pk