Toll Road SPV: Covenant Breach and SMA Classification
An SPV operating a 120 km toll road has a ₹2,100 crore term loan at 9.0% from a consortium led by a DFI. In FY24, toll revenue was ₹310 crore against a base case of ₹360 crore; O&M was ₹58 crore; interest was ₹189 crore and scheduled principal was ₹75 crore. The SPV held ₹40 crore cash and a ₹30 crore DSRA. The loan agreement requires a minimum DSCR of 1.10x and net debt/EBITDA below 7.5x; dividends are permitted only if both are met. The interest instalment due on 30 June 2024 remained unpaid on 2 August 2024, when the account was reviewed. The CFO attributes the shortfall to a 12% traffic decline caused by metro construction on the parallel corridor and expects recovery in 18 months; the sponsor has offered ₹12 crore equity but wants a three-year principal moratorium and a 50 bps rate reduction.
1. Compute DSCR, net debt/EBITDA and interest coverage. Assess the covenant position and explain the immediate consequences for the borrower and lenders.
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EBITDA = ₹310 − ₹58 = ₹252 crore. Debt service = ₹189 + ₹75 = ₹264 crore. DSCR = 252/264 = 0.955x. Net debt = ₹2,100 − ₹40 = ₹2,060 crore; net debt/EBITDA = 2,060/252 = 8.17x. Interest coverage = 252/189 = 1.33x.
Both covenants are breached: DSCR is below 1.10x and leverage is above 7.5x. The immediate consequence is a cash lock-up and dividend block, not automatic acceleration; the lenders should require a cure plan. The DSRA of ₹30 crore can meet part of one instalment, but using it does not improve the cash-flow DSCR and creates a future top-up obligation. The ratio is also flattered by the ₹40 crore cash balance; if that cash is needed for O&M or DSRA, net debt is higher.
The DFI should verify that revenue is net of tolling discounts, that O&M is not deferred maintenance, and that principal is not being met from the DSRA on a recurring basis. A one-off DSRA draw is liquidity management; repeated draws are a solvency signal.
2. Classify the account for regulatory reporting as on 2 August 2024 and lay out the day-count. When would it move to SMA-2 and NPA?
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Interest due 30 June 2024, unpaid on 2 August 2024, is 33 days overdue (1 July = day 1). Under RBI's IRAC norms, SMA-1 is 31–60 days, SMA-2 is 61–90 days, and NPA is more than 90 days. The account is therefore SMA-1 as on 2 August, not NPA.
It moves to SMA-2 on 30 August 2024 (day 61) and to NPA on 28 September 2024 (day 90) if still unpaid. The DFI must report the SMA classification, maintain the asset classification, and not upgrade until overdue amounts are cleared. If the borrower pays only part of the interest, the account remains SMA; partial payment does not cure the classification. Compliance should also check whether the account was already SMA in prior months, because repeated SMA episodes are an early-warning signal.
3. Should the DFI accept the sponsor's request for a three-year principal moratorium and a 50 bps rate cut? Set out the analysis and the conditions you would impose.
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The request should not be approved on the sponsor's forecast alone. The 12% traffic shortfall may be temporary, but metro construction timelines routinely slip, and a three-year principal moratorium plus a 50 bps rate cut transfers risk to lenders without a corresponding equity contribution.
First, commission an independent traffic study and test whether the shortfall is corridor-specific, permanent, or due to toll leakage. Second, require the sponsor to inject the ₹12 crore immediately and top up the DSRA; a moratorium should not be granted while the sponsor takes dividends or related-party payments. Third, if the stress is temporary, use a standstill and a cash sweep, not a rate reduction. If it is permanent, restructure under the board-approved policy and RBI's prudential framework for stressed assets, with a credible resolution plan, 100% lender consent where required, and proper asset classification during the standstill.
A rate cut should be the last tool, because it masks the true DSCR and may constitute evergreening. Any moratorium should be paired with a sponsor equity cure, a cash sweep, step-in rights, and a hard milestone for traffic recovery.