Fitch assigns 'BBB-(EXP)' rating to REC's MTN programme

Fitch Ratings today said it has assigned state-run Rural Electrification Corp's USD one billion medium-term note (MTN) programme an expected rating of 'BBB-(EXP)'.
"Notes issued under the programme may be in any currency or of any tenor. The net proceeds from each issue will be used for funding power sector infrastructure," Fitch Ratings said in a statement.
According to the statement final ratings of the proposed MTN programme are contingent upon the receipt of final documents conforming to information already received.
It said that the programme's rating is aligned with REC's Issuer Default Rating on the basis that the notes issued under the programme will constitute REC's direct, unconditional and unsecured obligations rank pari passu with all its other present and future outstanding unsecured and unsubordinated obligations.

REC's ratings are equalised with those of the Indian sovereign (BBB-/Stable). This reflects its public-sector status, ownership by the government of India and strong strategic state ties that result in a strong likelihood of extraordinary state support being provided if needed. REC is therefore classified as a credit-linked public-sector entity under Fitch's criteria, it said.
REC is one of the two public financial institutions that provide funds exclusively to the Indian power-sector and is the sector's second-largest lender.

The state has appointed REC as the sole central agency to implement two nationwide power reform projects aimed at increasing electricity coverage in rural areas and subsidising electricity distribution projects.

The government owns 60.64 per cent of REC and has provided support by allowing REC to issue tax-free bonds and 54 EC Capital Gains Tax Exemption Bonds. REC can also raise foreign commercial borrowing of up to 75 per cent of its net worth without state approval.
Fitch expects REC to continue receiving state support. The state controls REC through its board, and the Ministry of Power signs yearly memorandums of understanding with REC to set annual operational and financial performance targets, which it reviews quarterly. India's comptroller and auditor general annually appoints auditors for REC.
REC's capital adequacy ratio was 20.38% at the end of the financial year to March 2016 (FYE16), higher than the 15% regulatory requirement. REC's healthy profitability is underpinned by its comfortable interest spread and lean operating cost structure.

Fitch expects REC's net profit to increase by 15-20 per cent a year during FY17-FY19, driven by our forecast of 10-15 per cent annual growth in outstanding loans and the company's ability to maintain its interest spread at the current level.