Executive summary

In 2023, Crisil Ratings conducted a study of 80 stressed infrastructure assets to understand the trends in loss-given default (LGD) in the sector. The results were published in our report, ‘A structural lift for infra LGD: time to factor in improvements in the ecosystem’.

We have now increased the sample to 150+ assets that have happened over the last decade, to make it more representative. Additionally, we have studied some of the sub-sectors, such as roads and power, in greater detail.

The widened sample reaffirm the LGD for infrastructure assets in the 20-60% range, well below the typical LGD (60-80%) factored in by lenders. Sectors such as renewables (solar, wind) and transmission indicated a low LGD trend of 20-30%. LGD in the power sector, encompassing thermal, hydro and gas-based projects, was found at the higher end of the spectrum, at 60-70%, whereas the road sector LGD remained typically in the 25-35% range for annuity projects and 35-50% for toll projects.

The updated study interestingly highlights the dynamic nature of infrastructure LGD, which varies based on multiple factors, including project type, authority, operational status, counterparty profile, timing of the default, priority of claims and overall macro and regulatory environment.

For instance, typical LGDs for annuity road projects¹ were at 25-35%, significantly lower than toll road projects. Similarly, LGDs for road projects with central counterparty was lower at 30-40% compared to state road projects, which was at 50-55%. Furthermore, LGDs for operational road projects were significantly lower at 25-35% compared with those for under-construction road projects at 45-55%.

Infrastructure LGDs have also come down over time, after the implementation of the Insolvency and Bankruptcy Code (IBC) 2016. For instance, road sector LGDs, after fiscal 2016, were low at 20-25% against 35-40% pre-2016.

In the case of the power sector, gas-based projects indicated a higher LGD compared with other power assets. This underscores the point that LGD is not a constant number and should be looked at more fundamentally.

Similar to the 2023 study, the updated study involves infrastructure assets for which data was available courtesy the involvement of Crisil Ratings as a rating agency in providing recovery risk ratings/independent credit evaluations in the stressed assets space. For other assets, data was collected from publicly available sources, including the Insolvency and Bankruptcy Board of India (IBBI) website and other recognised portals.

The infrastructure sector in India has witnessed a slew of measures that have addressed legacy issues. This is reflected in a raft of policy facilitations that have helped to shore up by several notches the attractiveness of Indian infrastructure as an investment destination.

With these measures, a gradual perceptible shift is seen in the infrastructure sector’s credit profile. Infrastructure assets today are better poised to withstand potential stress. Furthermore, in a post-default scenario, the inherent nature of infrastructure assets and many of the favourable policy measures typically result in lower losses.

Rightfully, this improvement in risk profile should be reflected in both probability of default (PD) and LGD – the twin pillars of credit risk.

¹ Annuity also includes hybrid annuity model (HAM) assets