S&P Cuts Tata Power Outlook to ‘Negative’

Standard & Poor's has downgraded the credit rating outlook for Tata Power to 'negative' from 'stable' because of high debt and rising expenditure at the 4,000 mw ultra mega project at Mundra, triggering a 2% fall in the firm's shares. "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-toequity ratio covenant on loans to its Mundra project," S&P credit analyst Rajiv Vishwanathan said. Tata Power said the breach did not amount to a payment default and that it expected a favourable outcome of its talks with lenders. "To support CGPL's (Coastal Gujarat Power, the Tata Power arm implementing the project) cash flows, the company has been in advanced talks with lenders," S Ramakrishnan, executive director (finance) of Tata Power, said in a statement. Debt-to-Equity Ratio has Increased Sharply in Past Months  "The company has been in advanced discussions with the lenders to finalise structure for transferring coal SPV dividends. The matter is under consideration by the lenders for approving waivers in certain cases," Tata Power's Ramakrishnan said.  "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. Further, the covenant breaches do not constitute a payment default," he said. According to the loan covenant, or the agreement with the banks, Coastal Gujarat Power needs to maintain a debt-toequity ratio of 3:1. However, the ratio has increased sharply in the past few months, breaching the prescribed level. "It is a technical breach of the covenant and we expect the banks would give a waiver to CGPL. Banks continue to allow the company to access funds and that gives us the comfort they would give a waiver," Allan Redimerio, S&P's Asia Pacific director and analytical manager, told ET.  The Mundra project and Reliance Power's proposed ultra mega power plant at Krishnapatnam, Andhra Pradesh, are suffering due to higher cost of imported coal, prompting demands for a tariff revision. Tata Power has already started generation, while Reliance Power is in the midst of a legal dispute with utilities that want to penalise the company for the delay in building the project.  In 2011-12, Tata Power reported a consolidated loss of Rs 1,087.68 crore against a profit of Rs 2,059.60 crore a year ago. It suffered on account of provisions of Rs 1,800 crore for the Mundra project. The high price of imported coal along with the rupee's depreciation has hurt the economics of the project.  S&P affirmed its 'BB-' long-term corporate credit rating on Tata Power and 'BB-' issue rating on the company's senior unsecured notes. A 'BB' rating is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitments.  Redimerio said Tata Power was in negotiations with lenders on the technical breach in the loan covenant. "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% of the project facility. Nevertheless, we understand that current disbursements from project facilities have not been curtailed," S&P said.  CGPL commissioned the first unit of 800 mw Mundra UMPP in March last year. The second 800 mw unit is likely to be commissioned in August.  S&P said it may downgrade Tata Power further if the company is unable to secure a waiver from lenders on the breach of covenant or if an increase in expenditure due to the Mundra project weakens parent company Tata Power's financial risk profile.  The rating agency may consider an upgrade if Tata Power secures the necessary waiver, and construction at the Mundra project continues within budget. The company faces no material deterioration in its business and sustainably maintains its financial risk profile, such that its ratio of funds from operations to adjusted debt is 10-12%.