RPT-Fitch Revises Rural Electrification Corporation's Outlook to Stable; Affirms IDRs at 'BBB-'
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June 13 (The following statement was released by the rating agency)
Fitch Ratings - Hong Kong/Barcelona/Singapore - 13 June 2013: Fitch Ratings has revised the Outlook on India-based Rural Electrification Corporation Limited's (REC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed its IDRs at 'BBB-'. A list of additional rating actions is provided below.
KEY RATING DRIVERS
The rating action follows Fitch's revision of the Outlook on India's Foreign and Local Currency IDRs to Stable from Negative (see rating action commentary "Fitch Revises India's Outlook to Stable; Affirms Ratings at 'BBB-" dated 12 June 2013 at www.fitchratings.com).
REC's ratings reflect the entity's public sector status, government ownership, and strong operational and strategic ties with the government of India (GoI), resulting in a strong likelihood of extraordinary government support if needed.
As such REC has been classified as a dependent public sector entity under Fitch's criteria and the ratings are credit-linked to that of the sovereign. REC is the central agency on behalf of the GoI in implementing the government's Rajiv Gandhi Grameen Vidyutikaran Yojana and National Electricity Fund schemes aimed at increasing electricity coverage in rural areas and providing subsidies to electricity distribution projects respectively.
The GoI presently owns a 66.8% majority stake in REC, after having reduced its interest twice in the past five years, and has a track record of providing support to REC through permission to issue tax-free bonds, raising foreign commercial borrowing up to 75% of its net worth without prior government approvals, as well as providing funds from budgetary allocation and debt guarantee. Fitch expects REC will continue to receive support from the GoI.
The Ministry of Power signs a memorandum of understanding with REC every year to set its annual operational and financial performance targets, which it reviews on a quarterly basis. The Comptroller and Auditor General of India appoints auditors of REC on an annual basis.
REC loans have risen by over 91% from March 2010 to March 2013 due to strong demand from the power sector as well as government policy to extend coverage. Loan demand is forecasted to remain strong with a projected growth of 54% by FY15. Part of the growth will be funded by borrowing and debt is projected to rise by 57% by this date.
Concentration risk arises from REC's exposure only to the power sector, with the top five borrowers accounting for around 30.9% of its total exposure as of March 2013. However, this risk is partly mitigated by state governments' guarantees to part of its loan assets and the use of escrow accounts.
REC's capital adequacy ratio stood at 17.71% at end-FY13, which provides sufficient buffer to the regulatory requirement of 15%. REC's high profitability is characterised by its reasonable interest spread and return on net worth of 3.62% and 23.85% at end-FY13 respectively.
A positive rating action would stem from a similar change in the ratings of sovereign in conjunction with continued strong explicit and implicit support from government.
Material changes to its strategic importance and central agency status in the power sector or a further dilution in the government 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 rating.
Other rating actions are as follows:
CHF200m (USD215.05m) bond affirmed at 'BBB-'
USD500m bond affirmed at 'BBB-'
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