ICRA weighs UDAY effect on Power Finance Corp

PFC planning to raise Rs 42, 000 cr in AAA-rated long-term funds and Rs 8, 000 cr in A1+ short term money

The government’s Ujwal Discom Assurance Yojana (UDAY) scheme to help ailing power distribution companies (discoms) could weaken Power Finance Corporation (PFC’s) profitability and impact its credit growth over the next two years, says rating agency ICRA.

However, it has also pointed to the potentially beneficial effects of UDAY and kept its rating high.

In a report on the state-owned lender’s borrowings, it said PFC planned to raise up to Rs 42,000 crore in long-term funds (rated AAA) and up to Rs 8,000 crore in short-term money (A1+) in the current financial year 2016-17.

Icra does say effective rollout of UDAY is important for improving the financial health of PFC’s borrowers. And, its credit quality rating, highest in the scale, continues to reflect PFC’s majority sovereign ownership (67.8 per cent equity with the Government of India, or GoI).

It has been given a key role in implementation of various GoI schemes, such as Ultra Mega Power Projects and Integrated Power Development Scheme. Close to 18 per cent of PFC’s exposures are to state discoms. About 75 per cent of which could under UDAY get repaid by March 2017, while the rest could get re-priced at 10 basis points above the base rate.

The scheme proposes a phased takeover of discom debt by state governments and steps to improve operational efficiencies, reduce cost of power purchase and enforce financial discipline of discoms.

ICRA said PFC is one of the major sector financiers, important for the government, given the latter’s objective of augmenting power capacities across the country. The ratings continue to draw comfort from PFC’s adequate earnings profile, supported by its strong financial flexibility, ability to borrow funds at competitive rates and low intermediation costs, Icra said.

The package is expected to reduce the vulnerability of PFC’s exposures to discoms and also reduce counter-party risks on its exposure to the independent power producers (IPPs) segment.

Additionally, with the financial health of discoms improving, some pick-up in the signing of power purchase agreements (PPAs) by discoms could happen. This would lower the offtake risk for some of the power projects funded by banks.

As on December-end, PFC’s exposure to the private sector, i.e. IPPs, was 16 per cent of total advances. Several IPP exposures have high vulnerability, being impacted by the sectoral concerns with respect to fuel availability, disputed/competitive power sale rates, lack of PPAs leading to high offtake risk and environmental and land acquisition issues, it added.

TAKEAWAYS

• Close to 18% of PFC’s exposure is to state discoms
   
• UDAY scheme to turn around financial health of discoms
   
• PFC debt carries highest credit rating of “AAA”
   
• Government of India owns 67.8% stake in PFC
   
• High concentration of weaker-credit-quality state power utilities