Tata Power gets time to mend Mundra loan

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Firm unlikely to default on repayments: lenders

Tata Power Company, one of India’s largest private sector integrated power companies, has secured an extension from its lenders for curing the breach in covenants at the wholly-owned subsidiary that is building the Mundra ultra mega power project (UMPP). A member of the board of directors of Tata Power told Financial Chronicle that the lenders have given them an extension of time till June 14 to remedy the covenant breaches.

Lenders told FC that the assets continue to be standard. It means that lenders do not perceive any default in repayment of principal or payment of interest.

FC had earlier reported that the company, chaired by Cyrus Mistry, is in talks with its international lenders led by International Finance Corporation, Washington, and domestic lenders led by State Bank of India to provide additional security to back up the loans made to Coastal Gujarat Power (CGPL) — the special purpose vehicle (SPV) that is implementing the Mundra UMPP.

In the quarter ended December 2012, the company recognised an additional impairment of Rs 600 crore to the equity investment in CGPL citing inadequacy of cash flows compared with earlier projections, due to the high costs of imported Indonesian coal that were not compensated by adequate tariffs. In its analyst performance update for the penultimate quarter of the ongoing financial year, the company said the impairment was due to ‘under recovery of fuel costs reducing margins, making operating profit inadequate to cover interest and depreciation’.

In the October-December 2012 quarter CGPL recorded an operating income (revenues) of Rs 798.6 crore and a loss after tax of Rs 829.6 crore. For the nine-month period ended December 2012, CGPL recorded operating revenues of Rs 1,446.6 crore and a loss after tax of Rs 1,455.1 crore. The high losses have eroded the net worth of CGPL substantially. This has resulted in a breach of crucial covenants such as the minimum debt to equity ratio to be maintained.

With the government considering a mechanism for price pooling of coal to ensure imported coal based power projects don’t get stranded due to expensive fuel imports, lenders are hopeful of a solution to the projects woes.

The company has also had some issues with securing timely payment of dues from Rajasthan state electricity distribution company and had to threaten the public sector body with disconnection of supplies if its dues were not cleared. CGPL has also proposed to expand the Mundra project beyond 4,000 mw so that additional generation capacity can be sold at market rates and make good some of the losses from its existing units. The company has also filed a tariff revision petition with the Central Electricity Regulatory Commission for the Mundra project to up the electricity costs per unit.

“Lenders to the project continue to disburse loans as per schedule and we have no issue on this count,” said the TPC director. Foreign lenders to the project have committed $1.8 billion in external commercial borrowings. Rupee lenders had agreed to lend Rs 5,550 crore while TPC had committed to put in Rs 4,250 crore as equity in the project.

CGPL’s overseas lenders include the Export-Import Bank of Korea, Korea Export Insurance Corporation, Asian Development Bank and BNP Paribas. The domestic lenders include India Infrastructure Finance Company, Housing and Urban Development Corporation, Oriental Bank of Commerce, Vijaya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Travancore and State Bank of Indore.

Crisil and S&P had separately revised the outlook on Tata Power downwards, following the breach of covenants with the lenders respectively in April and July 2012.

In a note on April 9, 2012, Crisil said, "The outlook revision takes into account the unfavourable project economics for the project of Tata Power’s special-purpose vehicle CGPL, which has necessitated support from Tata Power in order to support debt servicing by CGPL. The unfavourable project economics of CGPL’s ongoing project, the 4,000 MW Mundra project, stem from the fact that 55 per cent of the variable charges in CGPL’s tariff are non-escalable, which, coupled with the high cost of imported coal and change in coal pricing regulations by the Indonesian government, have led to a diminution in the project’s debt servicing ability on a standalone basis – hence, the requirement of support from the dividends of the Indonesian coal companies."

Separately S&P said in a note, "We had expected Tata Power's ratio of funds from operations (FFO) to adjusted debt to improve to 13-15 per cent in 2011–2013. We have revised our expectation for the ratio of FFO to adjusted debt to 10-12 per cent over the next 24 months."

"We may lower the rating if Tata Power undertakes capital expenditure that involves a significant cash outlay in the next 12-18 months or the company makes a large debt-financed acquisition, such that its financial profile worsens sustainability. A ratio of FFO to adjusted debt of less than 10 per cent on a sustainable basis would indicate such deterioration," the report further stated.

S&P also said it may raise the rating on Tata Power if the company commissions its Mundra plant on schedule and within budgeted costs, or if it faces no material deterioration in its business and improves its financial risk profile sustainability, such that its ratio of FFO to adjusted debt improves to about 13-15 per cent.

(With inputs from Manju AB & Vikas Srivastav)



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