Moody's revises Tata Power's outlook to negative from stable

Hints rating could be lowered if acquisition bridge finance is short-term in nature

Moody's has revised to negative from stable the outlook on the Ba3 corporate family rating and senior unsecured rating of Tata Power following the announcement that the company has signed a share purchase agreement to buy Welspun Renewables Energy for Rs 9,250 crore.

Tata Power's Ba3 ratings include a one-notch uplift based on the assessment that Tata Power will likely receive support from its major shareholder, Tata Sons Ltd,(unrated), if needed.The ratings could revert to stable if Moody's considers that the terms of the bridge finance do not exert material credit and liquidity pressure on the rating, and the quality of assets being acquired are not materially weaker than those of Tata Power.

"The change in outlook to negative reflects the combined effect of 1)entirely debt-funded nature of the transaction, which reduces headroom within the ratings, 2) uncertainty regarding the terms and structure of the bank debt that will be raised to fund the acquisition, and 3) limited details about the quality of the assets being acquired," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst. However, he notes that with this acquisition, Tata Power's debt will increase by approximately 21%, thereby reducing the headroom within the rating.

"Moody's understands that Tata Power is raising a bridge bank facility to fund the transaction, and this facility could pressure the company's liquidity profile depending on its terms, including maturity profile,'' says Tyagi. With this transaction, Moody's expects Tata Power's adjusted debt/capitalisation to increase, but to remain below the rating tolerance level of 75%.

Moody's notes that the acquisition provides meaningful diversification benefits to Tata Power's business profile with the increase in renewable projects in its portfolio which also have long term power purchase agreements.

Tata Power's renewable energy portfolio nearly doubles with this acquisition and would represent approximately 23% of its generation capacity which is in line with its spelled out long term strategy of portfolio fuel mix.

However, there is limited information at this stage about the quality of the underlying assets being acquired and about Tata Power's ultimate plan to integrate them within its existing portfolio.

On the other hand, the ratings could be lowered if the acquisition bridge finance is short-term in nature and Tata Power is unable to refinance it with long term debt that is of similar terms relative to its existing debt, 2) Moody's considers that performance of the acquired assets is materially lower than that of Tata Power's existing assets.

The ratings could be also lowered if Tata Power raises its financial leverage further, leading to financial metrics exceeding the ratings tolerance, including (3) FFO interest coverage falling below 1.3x to 1.4x, adjusted debt/ book capitalization exceeding 75%, and RCF/debt dropping below 3.5% to 4.5% on a sustained basis.

Furthermore, the ratings could be pressured if Coastal Gujarat Power Limited (CGPL) -- which is a subsidiary of Tata Power -- fails to obtain waivers on its covenant breaches within a reasonable timeframe, and without significant additional costs or onerous new terms.