(Repeat for additional subscribers)
Jan 13 (The following statement was released by the rating agency)
Fitch Ratings has assigned Indian Railway Finance Corporation's (IRFC) proposed
US dollar notes an expected rating of 'BBB-(EXP)'. The rating is aligned with IRFC's Long-Term
Issuer Default Rating (IDR) of 'BBB-', which has a Stable Outlook.
The final rating on the notes issue is contingent upon the receipt of final
documents conforming to information already received.
KEY RATING DRIVERS
IRFC's ratings reflect the entity's public sector status, government ownership
and strong operational and strategic ties with the government of India,
resulting in a strong likelihood of extraordinary government support if needed.
As such, IRFC has been classified as a dependent public sector entity under
Fitch's criteria and the ratings are credit linked to that of the sovereign.
The ratings derive strength from the Ministry of Railways' ongoing support as
evidenced by regular equity injections into IRFC since its formation. IRFC's
debt/equity ratio has been close to the regulatory 10x limit in the past three
years. Fitch expects further capital injections from the Ministry of Railways if
this ratio were to exceed the limit. The ministry injected INR7.5bn and INR6bn
in FY12 and FY13, respectively.
IRFC is the sole financing arm of the Ministry of Railways and is mainly
involved in providing finance leases to rolling stocks including locomotives,
passenger coaches, and freight wagons among others. Fitch expects IRFC's
collaboration with the government to persist.
IRFC is wholly owned by the government and the board of directors is appointed
by the government. The Ministry of Railways signs a memorandum of understanding
with IRFC every year to set its operational and financial performance targets,
which it reviews on a quarterly basis. The Comptroller and Auditor General of
India appoint IRFC's auditors on an annual basis, enhancing government control.
It has been agreed with IRFC that the Ministry of Railways will cover any
shortfall, by making advance payments of lease rentals, if IRFC does not have
sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects
future standard lease agreements to continue to contain a similar assurance and
the ministry to provide funding to prevent liquidity mismatches that may lead to
an IRFC default.
IRFC's profitability is resilient and highly visible because its interest income
is charged on a cost mark-up basis and the capital investment pipeline of the
Indian railway sector is strong. Its assets and liabilities are closely matched.
With a sound reputation in capital market, Fitch expects IRFC to be able to
easily access domestic capital markets and banks for low-cost long-term funding.
A positive rating action would stem from a similar change in the ratings of the
Indian sovereign in conjunction with continued strong support from the
Significant changes to its strategic importance and financing arm status to the
Ministry of Railways or a dilution in the government's shareholding to less than
51% could result in the entity no longer being classified as a dependent public
sector entity and therefore no longer being credit- linked to the sovereign
IRFC was incorporated to raise funds from debt capital markets to finance the
acquisition of new rolling stock to meet the developmental needs of the Indian
railway system administered by the Ministry of Railways. Established in 1986,
IRFC is registered as a notified public financial institution under the
Companies Act, 1956 and as a non-banking finance company and asset finance
company under the Reserve Bank of India (RBI) Act, 1934.