Standard & Poor's Ratings Services said on Friday Power Grid Corporation of India Ltd outlook is negative.
“At the same time, we assigned our ‘BBB-' issue rating to the company's proposed issue of up to $1 billion unsecured long-dated notes. The rating on the notes is subject to our review of the final issuance documentation,” the ratings agency said in a statement released from Singapore.
A largely national presence exposes Power Grid to the country and macro economic risk of India, said S&P, adding that it believes political considerations will continue to influence the ability and willingness of State-owned electricity boards — the company's key customers — to increase tariffs, limiting the improvement in their weak credit profiles.
The negative outlook on Power Grid is consistent with the sovereign credit rating outlook and reflects Power Grid's sensitivity to Government intervention.
“We could downgrade Power Grid if we lower the sovereign credit rating or ongoing Government support declines,” said S&P.
S&P credit analyst Abhishek Dangra said, “We also believe there is an extremely high likelihood of extraordinary Government support to Power Grid in the event of financial distress. The weak credit quality of the company's customers and the country and macro-economic risk associated with India offset these strengths.”
"The regulatory environment for power transmission in India is stable in our opinion," he added.
The regulator has allowed transmission companies to recover 14-16 per cent return on equity over the past decade. The tariff also allows for cost recovery based on system availability by Power Grid regardless of the amount of power transmitted through its network. The company has maintained its system availability above 99 per cent over the past few years, and its collection record has been reasonable despite the weak credit profiles of its counter parties — the State Electricity Boards. Power Grid has a good project execution record.
“We do not expect Power Grid's ‘significant’ financial risk profile to change materially over the next two to three years. We anticipate that the company's aggressive capital expenditure plans toward expansion will continue to result in significant negative free operating cash flows,” Dangra explained.