Moody's to downgrade Tata Power on bank debt

Moody’s today said it was reviewing the corporate rating of Tata Power for possible downgrade, primarily due to bank debt related to the company’s Mundra ultra mega power project in Gujarat. The rating action reflects material covenant breaches on bank debt associated with 4,000 MW Mundra UMPP and questions relating to the project’s long-term impact on its financial profile, absence of changes to tariff structures, Moody’s Investors Service said in a statement. Covenant generally refers to an agreement between two parties.

[caption id=“attachment_353596” align=“alignleft” width=“380” caption=“The Mundra project is being executed by Coastal Gujarat Private Ltd (CGPL), a wholly-owned subsidiary of Tata Power. Reuters”]  [/caption]

Moody’s noted that covenant breaches do not constitute a payment default. The agency has placed Tata Power’s Ba3 corporate family rating, B1 senior unsecured bond rating and Senior Unsecured MTN Programme (foreign currency) rating of (P)B1 on review for downgrade. ‘Ba3’ rating indicates higher credit risk.

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The Mundra project is being executed by Coastal Gujarat Private Ltd (CGPL), a wholly-owned subsidiary of Tata Power. Commenting on Moody’s rating action, Tata Power Executive Director, Finance, S Ramakrishnan in a separate statement said that to support CGPL’s cash flows, the company has been in advanced discussions with the lenders to finalise structure for transferring coal SPV dividends.

To provide protection to CGPL and support its cash flows, Tata Power has already proposed to transfer atleast 75 percent of its equity interest in the Indonesian coal mines and also continues to evaluate other alternative options. “The matter is under consideration by the lenders for approving waivers in certain cases. Given the technical nature of the covenant breaches comprising mainly non cash entries

like impairment and forex costs, we believe our request should get favourable consideration.

Ray Tay, a Moody’s Associate Vice President-Analyst and lead analyst for Tata Power-said that CGPL is in the process of obtaining waivers from several financial institutions for the covenant breaches, but the issue may take several months to resolve. “While waivers are being negotiated, TPC will be subject to curtailment of new draws once it reaches the currently approved level of 83 percent of the project facility, thereby introducing greater liquidity risk, absent additional bank waivers,” Tay noted.

According to the statement, Moody expects to conclude its review in about one to three months. The 4,000 MW Mundra UMPP is based on imported coal. Noting that financial challenges at the project have created considerable strain for Tata Power, Moody’s said the covenant breaches reflect continued strain associated with forex and fuel cost risk at the Mundra project. The Mundra UMPP has been hit by regulatory changes in Indonesia that resulted in higher prices of coal. Also, the inability to fully pass through fuel costs to end users has also adversely impacted the project.

“The (covenant) breaches are related to TPC not meeting its agreed maximum debt to equity ratio and minimum debt service coverage ratios,” the Moody’s statement said. Meanwhile, Tata Power said it has done 70 percent blending with low cost imported coal to offset some of the increase in cost.

“The issue of rise in cost of imported coal is not specific to Mundra but impacts all imported coal based

projects in the country, which exist and would need to be developed from herein after. Representations have been made to beneficiaries, Ministry of Power and PMO to resolve this issue,” Tata Power Managing Director Anil Sardana said.

The first unit of Mundra UMPP started commercial operation in March this year and the second unit is scheduled for commissioning in August.

PTI