TEXT-Fitch revises outlook on Simhadri Power's bank loans to positive; affirms 'Fitch B-(ind)'

(The following statement was released by the rating agency)

Sept 10 - Fitch Ratings has revised the Outlook on India-based Simhadri Power Ltd's (SPL) INR2.3bn senior long-term loans to Positive from Stable and affirmed the National Long-Term rating at 'Fitch B-(ind)'.

SPL was incorporated by Steel Exchange India Ltd (SEIL) to design, construct, operate and maintain a 60MW waste heat recovery (WHR) power plant on the premises of SEIL-operated Gold Star Alloys Limited's directly reduced iron (DRI) plant at Sriramapuram Village in Andhra Pradesh. The DRI plant would provide fuel to the WHR boiler (coal fines, char from DRI kilns, DRI kiln waste gases) to produce around 40MW of power. The remaining 20MW will be generated using F-grade coal from the open market. Around 33MW of power will be purchased by SEIL under a 15-year fixed-price power purchase agreement (PPA).

The Outlook Revision reflects the better-than-expected construction progress at the plant and the likely benefit from an upward renegotiation of the price in the PPA to INR5.0/unit from INR3.6/unit. The likely commissioning date is October 2012 as against the originally scheduled January 2013, which provides SPL more time during the ramp-up phase before the first repayment falls due in December 2013. The Lender's Independent Engineer reports that as of July 2012, nearly 83% of the construction is complete.

The rating continues to be constrained by uncertainty regarding fuel supply and the affordability of the PPA tariff. Near-term drivers of the project's credit quality include the successful completion of the power project and its ability to achieve operational stability by sourcing adequate supplies of fuel - both from the sponsor's DRI plant and externally purchased coal. While the project does not have firm domestic coal supply arrangements, SPL has entered into an agreement with a trader for supply of imported coal. However, uncertainty regarding price and tenor of the contracts, notwithstanding the small quantity (239,190tpa) of coal required, limits any positive benefit being ascribed to the project from this agreement. If SPL does import coal, the higher fuel cost is likely to impact the project's debt service coverage ratios.

In the medium-term, the smooth functioning of the off-take arrangement with the sponsor would be a critical driver of the credit profile. Since around 20MW (33% of capacity) of power is to be sold as merchant power in a volatile market, SEIL's ability to purchase the full contracted volume of 33MW and make timely payments at the revised price would be essential for the project to realise forecasted coverage ratios. The off-take quantity under the PPA has also been marginally revised upwards to 33MW (55% of total plant capacity versus 50% previously). Both the price and volume changes in the PPA will likely to partially offset the impact of expensive fuel cost as the company is expected to import coal in case domestic F-grade coal is not available and also reduce dependence on merchant sales.

Funding risks are mitigated as the sponsor and its associates have infused the entire equity.

The rating reflects SPL's strong linkages with SEIL, as partial fuel supplier and power off-taker, which are reinforced by SEIL's unconditional and irrevocable guarantee to repay SPL's outstanding loan amount. However, Fitch views this guarantee as limited credit enhancement given SEIL's weak financial profile (for the three months ended 30 June 2012, SEIL reported a steep qoq decline in revenue and an EBITDA that did not cover fully even interest payments) and the potential invocation of the guarantee, which would take place post-default.

Positive rating action may result from timely completion of the power plant, tie-ups for fuel supply or a PPA for the remaining power and to achieve stabilisation of the plant performance during the ramp-up phase. A failure to achieve commercial operation beyond the scheduled date and achieving planned level of plant load factor may result in the Outlook being revised to Stable.