Standard & Poor's Ratings Services (S&P) on Friday lowered its rating on private power producer Tata Power.
The global rating agency has lowered its long-term corporate credit rating on the power utility to 'B+' from 'BB-'. “The outlook is negative,” S&P said in a statement released from Singapore.
"We lowered the rating on Tata Power because we believe the company's cash flows are likely to remain weak with a ratio of funds from operations (FFO) to adjusted debt at less than 10 per cent over the next 12 months,” said S&P credit analyst Rajiv Vishwanathan.
The primary drivers for Tata Power's lower cash flows on a consolidated basis are less-than-full recovery of fuel costs at a 4,000 megawatt coal-fired project at Mundra and lower returns from investments in Indonesian coal companies because of substantially reduced thermal coal prices.
The fully operational Mundra project exposes Tata Power to volatility in coal prices because the company can only pass through a part of fuel costs to its customers. The project’s ability to blend fuel with some low calorific value coal tempers the fuel-price risk.
India's Central Electricity Regulation Commission (CERC) recently issued an order for a full pass through of fuel costs at the Mundra project. A committee set up by CERC also recommended a mechanism for payment of a compensatory tariff to recover fuel-cost related losses at the project. These measures are likely to improve Tata Power's cash flows.
However, the timing and quantum of the tariff remain uncertain.
“We believe lenders to the Mundra project are likely to support the project despite the expiry of a waiver on a bank loan covenant breach in June 2013,” said S&P.
S&P assesses Tata Power's liquidity as ‘less than adequate,’ as our criteria define the term. Tata Power's weak consolidated cash flows are likely to weaken its ability to pay maturing debt over the next 18 months. Tata Power has large bullet debt maturities totaling about $670 million due in April 2014, July 2014, November 2014, and April 2015. S&P believes the company might undertake measures to meet its funding requirements.
“The negative outlook reflects the uncertainty regarding the company's plan to refinance its debt maturities over the next 12-18 months. The outlook also reflects uncertainty regarding approvals for the tariff relief at Mundra,” said Vishwanathan.
In the base case, S&P forecast an improvement in cash flows, particularly in 2015. However, a higher-than-usual level of uncertainty is attached to our base-case expectations.
“We may lower the rating if Tata Power's liquidity weakens further or if the company faces difficulty in refinancing its upcoming debt maturities in a timely manner. A downgrade could also follow a further deterioration in cash flows,” the rating agency said.
S&P said that it may revise the outlook to stable if Tata Power has a concrete plan to meet its upcoming debt maturities; eliminates its bank loan covenant breaches; and faces no material deterioration in its business.