Fitch Assigns Expected Rating to MeSEB/Board's Bond Issue

Fitch Ratings has today assigned an expected rating of 'BBB+(ind)(SO)' to Meghalaya State Electricity Board's (MeSEB/Board) proposed INR1,000m long-term unsecured non-convertible bond issue. At the same time, the agency has assigned a final rating of 'BBB+(ind)(SO)' to MeSEB's INR1,200m long-term unsecured non-convertible bond issue, allotted on 17 October 2007. The agency has also withdrawn the expected rating of 'BBB+(ind)(SO)' issued on 28 September 2007, with respect to the remaining INR1,000m non-convertible bonds.

The expected rating assigned to the bonds is based on the unconditional and irrevocable guarantee provided by the Government of Meghalaya (GoME) against repayment of principal and interest, and is further supported by a predefined payment mechanism. The final rating action follows the completion of the issue and receipt and review of transaction documentation conforming to information already received.

Fitch believes that MeSEB is an important vehicle for GoME in fulfilling its social and infrastructural obligations. The board's strong linkages to GoME are reflected in GoME's 100%-equity ownership and significant administrative control over MeSEB. It is currently under the transitional provisions of the Electricity Act 2003, and is required to be unbundled into separate companies. Fitch considers the unbundling of MeSEB as a rating event and will review its ratings when this happens.

MeSEB's standalone credit quality remains weak and the board is highly geared. Although MeSEB has reported positive EBITDA in FY08, this has primarily been on account of sales driven revenue growth and a reduction in power purchase costs due to increased generation from its own sources. The heavy dependence on the monsoon, high levels of aggregate technical and commercial losses in excess of 36%, coupled with accumulated losses totaling INR4bn have dented MeSEB's financial profile significantly. The board also remains exposed to the execution risks on new projects, which are typically high on hydroelectric projects.

MeSEB is a corporate body, constituted by GoME under the Electricity (Supply) Act 1948, to generate, transmit and distribute electricity in the State of Meghalaya. The board's installed capacity is 185.2MW and is entirely hydroelectric. In FY08 it sold 1058m units of electricity and made a profit after tax of INR233m on revenue of INR3.83bn (provisional accounts).

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.

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