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March 17 (The following statement was released by the rating agency)
Fitch Ratings has affirmed the rating on ITNL Offshore Pte. Ltd's (IOPL) CNY630m 5.75% bond due April 2015 at 'BBB-'.
KEY RATING DRIVERS
Guarantee by EXIM: The affirmation is based on the continued, unconditional and irrevocable guarantee of up to USD114m provided by Export Import Bank of India (EXIM, BBB-/Stable). The rating is also supported by a principal account of USD4m and a debt service reserve account (DSRA) amounting to one semi-annual coupon payment of around USD2.4m. The guarantee is available on a pari passu basis to both the bondholders and the provider of a swap to mitigate foreign exchange risk. The claims of the bondholders will have preference over the DSRA, while the principal account will be available on a pari passu basis to both the bondholders and the swap provider.
Foreign Exchange Risk Mitigated: The foreign exchange risk - with the debt obligation being in Chinese yuan while the guaranteed amount is in US dollars - has been mitigated through a swap arrangement. The CNY630m 5.75% bond is swapped into an USD100m 4.8% loan with Deutsche Bank AG (A+/Stable). If the swap continues till the bond's maturity, there will be no exchange rate risk.
However, if the swap is terminated before the bond's maturity, IOPL has to pay the swap holder a termination value based on adverse movement in exchange rates (yuan depreciation) and interest (increase in the base rates). In this case, the USD114m guarantee from EXIM and USD4m in the principal account, are expected to be sufficient to meet bondholder payments as well as payments to the swap provider at termination value, even under severe adverse movements in interest rates and the yuan-dollar exchange rate.
Overcollaterisation Provides Additional Buffer: The transaction also benefits from an overcollateralisation covenant, under which the sum of the bond's US-dollar guarantee and the balance in the principal account (and adjusted for the mark-to-market value of the swaps) must be more than 103% of the yuan-denominated sum of the principal amount of the bonds and one half-yearly interest payment. If the cover falls below 103%, then IOPL is required to fund the principal account in US dollars such that the US dollar cover is at least 108% of the yuan amount. Currently the overcollateralisation is about 114% of the yuan amount, providing significant headroom.
Bond Proceeds Part Fund Acquisition: IOPL used the bond proceeds to extend an USD89m loan (net of expenses and balances in the principal and interest accounts) to its associate company ITNL International Pte Ltd (IIPL). IIPL used the funds to repay part of the debt taken to purchase a 49% stake in Chongqing Yuhe Expressway Ltd (Yuhe). IIPL's income mainly comes from dividends and service fees from China-based Yuhe. Based on Fitch's estimates, it is unlikely that the cashflows received by IIPL from Yuhe will be sufficient to meet its interest costs over the next two to three years. The interest cost shortfall as well as the principal repayment will have to be funded through debt and exposes IIPL to refinancing risks.
Keepwell and Cross Default Clause with ITNL: India's IL&FS Transportation Networks Ltd (ITNL) - IOPL's 100% shareholder - has entered into a keepwell agreement with IOPL, under which, in the event that IOPL does not have sufficient cash or other liquid assets to meet any of its obligations, indebtedness, liabilities, costs, expenses or other payment obligations, ITNL will endeavour to make available to IOPL funds sufficient to meet such obligations in full.
The notes also contain a cross-default clause that includes ITNL. Fitch views ITNL's credit profile as being materially weaker to EXIM's credit profile. The rating of IOPL's bonds is linked to the guarantee by EXIM based on the aforementioned features of the transaction.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade of EXIM's rating
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-A downgrade of EXIM's rating