(The following statement was released by the rating agency)
July 09 -
-- Funding for Tata Power's Mundra project could be limited in the next
six to nine months after the company breached a debt-to-equity ratio covenant
on loans to the project.
-- The India-based power utility's cash flows and financial risk profile
are likely to deteriorate due to potential project delays and a need for the
company to fund project expenses if project loans are curtailed.
-- We are revising our outlook on Tata Power to negative from stable.
This reflects a one-in-three chance that the rating may be lowered in the next
-- We are also affirming the 'BB-' long-term corporate credit rating on
Tata Power and the 'BB-' issue rating on the company's senior unsecured notes.
On July 9, 2012, Standard & Poor's Ratings Services revised its outlook on
India-based power utility Tata Power Co. Ltd. to negative from stable. At the
same time, we affirmed our 'BB-' long-term corporate credit rating on Tata
Power and our 'BB-' issue rating on the company's senior unsecured notes.
The outlook revision reflects our 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 availability of loans to the project, which Tata
Power's 100%-owned subsidiary Coastal Gujarat Pvt. Ltd. (CGPL) controls, could
therefore be limited.
The outcome of Tata Power's negotiations with lenders on the technical breach
in the loan covenant is yet to be finalized. In the absence of the waivers,
CGPL will not be able to avail of the loan facility once its drawdown reaches
the currently approved level of 83% of the project facility. Nevertheless, we
understand that current disbursements from project facilities have not been
curtailed. In our view, Tata Power is likely to receive waivers from lenders
to the project.
Tata Power has booked an impairment in CGPL assets resulting from a sharp
depreciation of the Indian rupee (INR) against the U.S. dollar over the past
12 months. The currency depreciation has also increased CGPL's foreign
currency debt. The reduction in CGPL's equity and its higher debt resulted in
the breach of the debt-to-equity ratio covenant. The covenant requires the
project to have the ratio at less than 3x at the time of each loan
In our view, limited availability of project loans will increase Tata Power's
project expenses because the company is likely to fund the construction of the
remaining units of the Mundra power plant. This also increases the uncertainty
over the timing of commissioning of some units of the power project. We expect
Tata Power's ratio of funds from operations (FFO) to adjusted debt to be
10%-12% over the next 24 months.
The Mundra project also exposes Tata Power to a risk that coal prices could
increase because the company can only partially pass through fuel costs to
customers. Tata Power's stakes in coal companies provide a natural hedge to
higher coal prices and support its cash flows. Nevertheless, the hedge does
not fully eliminate the company's exposure to coal price volatility. Tata
Power's cash flows from the Mundra project and from the ownership of coal
companies could be lower on a consolidated basis if coal prices trend
downward. The ability of the Mundra power plant to operate using blended fuel
with some low calorific value coal may mitigate some of this risk. Tata Power
is negotiating with bank lenders a mechanism to include the cash flows from
the coal companies in the calculation of financial covenants for the Mundra
The rating on Tata Power also reflects the company's increasing exposure to
competitive generation projects. The positive demand outlook for electricity
in India, Tata Power's good operating efficiency, and the competitive position
of the company's core licensed operations temper the above weaknesses.