Short-Term Syndicated Loans In Vogue

The Central Electricity Autho-rity (CEA) has advised private power producers sourcing external commercial borrowings to avoid using instruments with long maturities, effectively forcing power developers to opt for syndicated loans instead of bond issues.

The advice follows from the assumption that such instruments could lead to a steep escalation in tariffs at the time of repayment. The CEA and state elec- tricity boards (SEBs) are not inclined to permit any escalation in tariffs beyond the figure agreed to in the power purchase agreements. In the event of exchange rate fluctuations in long-term borrowings, the power developers would have to bear the cost instead of passing it on to the customer through the tariff.

Consequently, power developers have begun to switch over from bonds to syndicated loans. In case of bonds, the initial years involve only coupon (interest) payments and a one-time repayment of the principal in the terminal year. By contrast, repayment of syndicated loans involves both a principal and an interest component during the entire tenor of the loan. Thus, the principal comes down each year as repayments are made on an annual basis.

The CEA and SEBs stance is that these costs (interest and exchange fluctuations) are components of power tariffs. The outcome of this is that the boards would have to service higher amounts in the case of bonds, while debt servicing costs would be lower for syndicated loans.

Apart from this, the board would have to bear higher exchange rates during the terminal year of the bond, which could lead to an increase in the power tariffs if the rupee depreciates. These costs, in turn, would have to be borne by the buyer