Rate hike may not affect thermal power projects: Fitch

Credit ratings agency Fitch today said that ratings of thermal power projects are not likely to be affected negatively by the hike in policy rates by the Reserve Bank of India (RBI).

It added that even in case the rates are hiked by another 100 basis points the impact on the projects would be minimal.

"Fitch has found that the current bout of increases is unlikely to cause any immediate negative rating action," the agency said in a statement.

It, however, added: "A 300 basis points increase in interest rate over the base case assumption could result in a maximum drop in minimum debt service coverage ratios (DSCR) by as much as 0.15%."

In such a situation the agency expects project costs to go up by 2-3.5%.

"Although contingency provisions have historically been low, funding this increase in project cost may not pose a huge challenge," Fitch said.

Fitch Ratings maintains outstanding ratings on a number of Indian thermal power projects.

It said that repeated rate hikes by RBI, totalling about 200 basis points since last one year, has made it attempt a quantification to analyse the impact of higher financing costs on project economics and debt payment capacity.

Public and private sector lenders have consistently increased interest rates following increase in short-term lending and borrowing rates by the RBI.

While some power projects have tied up fully contracted off-take agreements by means of long-term power purchase agreements with state-owned electric utilities facilitating pass-through of costs in the tariff, many others are fully exposed to price and volume risks.

"The debt of all of these power projects is funded by domestic commercial banks, whose terms include an interest reset provision at periodic intervals. 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," it said.