Moody's Investors Service has placed Tata Power Company’s (TPC) unsecured bond rating and unsecured foreign currency rating on review for downgrade.
The rating action reflects material covenant breaches on bank debt associated with TPC’s Mundra Ultra Mega Power Project (being executed under its 100 per cent subsidiary Coastal Gujarat Pvt Ltd or CGPL), and questions relating to the project’s long-term impact on TPC’s finance.
The breaches do not constitute a payment default.
“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,” said Mr Ray Tay, Associate Vice-President, analyst and lead analyst for TPC.
“While waivers are being negotiated, TPC will be subject to curtailment of new draws once it reaches the approved level of 83 per cent of the project facility, thereby introducing greater liquidity risk, absent additional bank waivers,” he said.
Moody’s said the coal-based 4,000 MW Mundra project’s value is about Rs 18,000 crore or 30 per cent of its total assets reported in FYE2012.
Financial challenges have created considerable strain and the covenant breaches reflect forex and fuel cost risk at the Mundra project, which has been hit by regulatory changes in Indonesia and the inability to fully pass through fuel costs.
This has led to reduced cash flow and TPC’s announcement of booking an impairment on the CGPL assets of Rs 1,800 crore or around 10 per cent of the Mundra project value, as reported in its FYE 3/2012 results. The breaches are related to TPC not meeting its agreed maximum debt to equity ratio and minimum debt service coverage ratios.
Tariffs for CGPL’s Power Purchase Agreements combine both fixed and variable elements, including fuel costs, which only benefit from 45 per cent cost pass-through.
CGPL’s debt, which is partly funded by dollar loans, are also affected by adverse movements in forex rates, which had seen variance of about 20 per cent in the past 12 months.