Changes to hybrid annuity model will help protect returns for road project developers: Icra

New Delhi: Recent changes to Hybrid Annuity Model (HAM) for road sector projects will help in improved cash conversion cycle as well as protect the returns for developers, rating agency Icra said on Thursday. It also said that changes in model concession agreement with a shift to Marginal Cost of Funds-based Lending Rate (MCLR) from bank rate for computing interest on annuities is a very positive development.

The interest on annuities for HAM projects is sizeable, amounting to around 45 per cent of overall inflows during the concession period.

Currently, the prevailing low bank rate is expected to reduce the overall inflows for a HAM project thereby adversely affecting its debt coverage metrics and returns to the investors, the rating agency said in a statement.

Rajeshwar Burla, Vice President (Corporate Ratings) at Icra said that linking interest on annuities with the RBI's bank rate has been a pain point for developers due to inefficient transmission of interest rates.

With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs, thereby reducing the interest rate risks to a large extent. This is a positive move that will protect the returns of the HAM developers and improve the overall attractiveness of the model, Burla noted.