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The outlook on Tata Power Co. Ltd, India’s largest private power generator, has been lowered to negative from stable by Standard and Poor’s (S&P) Ratings Services on expectations that the company’s “cash flow and financial risk profile” would worsen in the next two-three quarters. The agency, however, has affirmed its BB- long-term corporate credit rating.
The rating action, the second by an agency in less than a month, has come because the Tata company breached some key loan covenants relating to its 4,000 megawatts Mundra ultra mega power project.
Moody’s Investors Service had placed the power generator under “review” for a possible downgrade on 21 June for the same reasons and raised “questions relating to the project’s long-term impact on the (company’s) financial profile, absent changes to cost or tariff structures”.
A ratings downgrade could raise the cost of borrowing for the company. Breaking a covenant–legally enforceable promise or restriction imposed by lenders on borrowers–could additionally limit the amount of loans available to a company from lenders, but it doesn’t constitute a default.
S&P credit analyst Rajiv Vishwanathan said that the outlook revision reflected the “expectation that Tata Power’s cash flow and financial risk profile could deteriorate over the next six to nine months because the company has breached a debt-to-equity ratio covenant on loans to its Mundra project”. The breach could “limit” the availability of loans to the project, he said.
In a 29 May story, Mint had reported that Tata Power was negotiating a waiver with Mundra lenders after it broke some loan covenants and was looking to restructure assets as part of the exercise.
It is planning to transfer at least 75% of its stake in Indonesian coal mines to the entity that runs Mundra plant to channel dividends flowing in from the mines towards debt servicing. Lenders were concerned that cash flows from the Mundra operations would not be enough to service the loans totalling about Rs.14,000 crore.
S&P’s statement said that negotiations with the lenders were “yet to be finalized” and “in the absence of the waivers, CGPL (Coastal Gujarat Power Ltd, the entity operating Mundra) will not be able to avail of the loan facility once its drawdown reaches the currently approved level of 83% of the project facility.”
The covenant breaches don’t constitute a payment default, S. Ramakrishnan, executive director (finance), said in a company release.
“To support CGPL’s cash flows, the company has been in advanced discussions with the lenders to finalize structure for transferring coal SPV (special purpose vehicle) dividends,” he said. “The matter is under consideration by the lenders for approving waivers in certain cases. Given the technical nature of the covenant breaches comprising mainly non-cash entries like impairment and forex costs, we believe our request should get favourable consideration.”
An equity analyst with a domestic brokerage said that the rating action was “just stating the obvious”. Mundra’s woes and breach of loan covenants were “known”, said this analyst, adding: “The restructuring (of coal mines into CGPL) is meant to give comfort to the lenders. It has nothing in it for the equity holders.”
Tata Power’s stakes in coal companies “provide a natural hedge to higher coal prices and support its cash flows”, explained S&P, and the power generator was “negotiating with bank lenders a mechanism to include the cash flows from the coal companies in the calculation of financial covenants for the Mundra project”.
The rating agency said it could revise the outlook upwards if it secured the waiver, proceeds with Mundra construction “as planned and within budget” and “faces no material deterioration in its business”.
Inability to secure the waiver or expenditure escalations could lead to a downgrade, it said.
Shares of Tata Power declined nearly 2% to Rs.101.40 apiece on Monday on BSE, while the equity benchmark Sensex fell 0.74% to 17,391.98 points.
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