Global ratings agency Standard & Poor's Ratings Services on Monday said it has revised its outlook on Tata Power to ‘negative from stable.’ However, the rating of the private power producer remains unchanged at 'BB-'.

“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,” Standard & Poor's credit analyst Mr Rajiv Vishwanathan said in a statement released from Singapore.

“The availability of loans to the project, which Tata Power’s 100 per cent owned subsidiary Coastal Gujarat Pvt. Ltd. (CGPL) controls, could therefore be limited,” it added.

Tata Power couldn’t be reached immediately for comments on the issue. 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. The company has 30 per cent stake in Indonesian coal mines – KPC and Arutmin.

The ratings agency has pointed out that the outcome of Tata Power’s negotiations with lenders on the technical breach in the loan covenant is yet to be finalised. 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 per cent 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,” the statement said.

In 2011-12, Tata Power reported consolidated lower profit after tax at Rs 1,087.68 crore against Rs 2,059.60 crore in the previous year. This was primarily due to provisions of Rs 1,800 crore of impairment for Mundra project and Rs 659.44 crore of deferred stripping costs.

S&P said that Tata Power has booked impairment in CGPL assets resulting from a sharp depreciation of the Indian rupee against the 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, it observed.

At the same time, S&P said that it may consider lower the rating on the company if it is unable to secure a waiver from its lenders on the breach of covenant or an increase in expenditures due to the Mundra project.

S&P would revise outlook to stable if it secures the necessary waiver and construction at the Mundra project continues as planned and within budget.

“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,” said Mr. Vishwanathan.

"This also increases the uncertainty over the timing of commissioning of some units of the power project,” he added.

siddhartha.s@thehindu.co.in

(This article was published on July 9, 2012)
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