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Fitch Ratings maintains outstanding ratings on a number of Indian thermal power projects. Given the uninterrupted increase in interest rates in India — some 200 bps since about April 2010 — the agency attempted to quantify the impact of higher financing costs on project economics and debt payment capacity.
No immediate action
Fitch has found that the current increases are unlikely to cause any immediate negative rating action.
Almost all Fitch-rated power projects are under varying stages of construction. While some projects have tied up fully contracted off-take agreements via long-term power purchase agreements (PPAs) with State-owned electric utilities that provide for a pass through of costs (including interest) in the tariff, many others are structured as pure merchant power plants (MPPs) that are fully exposed to price and volume risks. Some plants adopt a mix of the two models.
The debt of all of these power projects is funded by domestic commercial banks, whose terms include an interest reset provision at periodic intervals, some annually. Certain loan agreements allow for the interest rate to remain fixed for the entire construction phase, thus ensuring that there is no cost over-run at least on this account.
Obviously, MPPs that have no tariff guarantees would suffer a contraction in financial margin.
Credit quality
However, Fitch said if interest rates continue to rise and remain at very high levels over the life of the loans, then debt service coverage ratios which, in many cases, are already weak — could come under pressure and start affecting credit quality.
Fitch's calculations show that in projects where construction is well underway and where loan draws have commenced, cost over-runs on account of interest rate increases may not be pronounced — considering the shorter residual time to achieve completion.
Even in extreme situations where a project has just drawn a loan and the applicable interest rate has increased by 300 bps, the agency expects the additional cost of the project to be in the region of 2 to 3.5 per cent depending on the drawdown schedule and gearing level.
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