Ratings agency Moody’s has placed Tata Power Company's (TPC’s) Ba3 corporate family rating on review for a possible downgrade due to material covenant breaches on bank debt associated with the Ultra Mega Power Project at Mundra in Gujarat.
However, the covenant breaches do not constitute a payment default, went a Moody’s Investor Services statement. The breaches are related to TPC not meeting its agreed maximum debt to equity ratio and minimum debt service coverage ratios. Coastal Gujarat Pvt Ltd, subsidiary of Tata Power, is implementing the 4,000 Mw project at Mundra in the Kutch region, based on imported coal. The project value is around Rs 18,000 crore (in excess of $3 billion) or 30 per cent of TPC’s total assets reported in 2011-12. Financial challenges at the project have created considerable strain for TPC, as evidenced by the covenant breaches, the rating agency said.
Moody’s also put the B1 senior unsecured bond rating and Senior Unsecured MTN Program (foreign currency) rating of (P)B1 under review for a downgrade. The review action reflects questions relating to the project’s long-term impact on TPC’s financial profile, given the cost and rate structures.
“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,” says Ray Tay, a Moody’s associate vice-president. While waivers are being negotiated, TPC will be subject to curtailment of new draws once it reaches the currently approved level of 83 per cent of the project facility, thereby introducing greater liquidity risk, absent additional bank waivers, said Tay.
The review of ratings for a possible downgrade would focus on whether the waivers could be obtained quickly. It would also focus on whether the inclusion of any resulting lenders’ conditions may adversely affect TPC’s operations or the Mundra project.
Moody’s would look at actions taken by TPC’s management to improve the long-term financial viability of the Mundra project; and the ability and willingness of TPC’s management and its holding company to support the project and to adequately contain risks associated with the covenant breaches, it said.