The likely loss to Uttar Pradesh State Power Sector Employees Trust due to investments in controversial Dewan Housing Finance Ltd (DHFL) will have an impact on UP Power Corporation Ltd's (UPPCL's) financial performance, according to India Ratings and Research (Ind-Ra).
The trust manages retirement funds of people employed by UPPCL and its subsidiaries. It has investments of Rs 4,300 crore of which Rs 2,600 crore were in DHFL. Of these, Rs 1,000 crore have been realised.
As per Employees' Provident Funds Act 1952, the employer (in this case UPPCL and its subsidiaries) is responsible and will have to make good for the loss that may be caused to the provident fund due to theft, burglary, defalcation, misappropriation or any other reason.
"Unless the government of Uttar Pradesh steps in to bail out UPPCL, this loss will have to be borne by the UPPCL. This will have an impact on its bottom line," said Ind-Ra in the analysis.
"However, servicing of UPPCL's bonds will not be impacted since these are serviced from the top line and have a strong structure and external credit enhancements in place."
Ind-Ra has rated bonds of UPPCL totalling Rs 19,989 crore which were raised during FY17 and FY18 under two different series and in two separate tranches of each series. Both the series are top-line (revenue) funded and serviced bonds.
From the first day of each quarter of the interest and repayment schedule of the bonds, UPPCL has been remitting daily an amount on a pro-rata basis (arrived in a manner to complete the required build-up) within 75 days to the respective bond servicing accounts.
While bonds under both series are guaranteed by the state government, they are also supported by bond specific internal and external credit enhancers. The bond specific credit enhancers define the credit quality of the series, leading to the agency's differential credit view on the two series.
In case of debt service reserve account (DSRA) impairment, the power subsidy received by UPPCL and its subsidiaries will become available to the trustees for recouping the DSRA. This power subsidy is being routed into a specified account (subsidy account) with a default escrow mechanism which gets triggered in case of DSRA impairment or shortfall.
Further, to ensure sufficiency of the power subsidy to meet DSRA impairment, the structure ensures that in case the flow into subsidy account is less than Rs 600 crore per quarter for any two consecutive quarters, the revenue flow from urban domestic divisions will be hypothecated in favour of the debenture trustee until the flow into subsidy account is restored to Rs 800 crore per quarter.
Both the series of bonds are further supported by liquidity buffer available in the form of rolling DSRAs which were created one working day prior to the deemed date of allotment. In line with the transaction documents, DSRA accounts are being maintained at an amount equivalent to the total debt servicing obligation (principal and interest) for the next one quarter for bonds of series one and two quarters for bonds of series two.
Since it is a rolling DSRA, said Ind-Ra, UPPCL has been stepping it up to meet the enhanced principal repayment obligation as and when required.
UPPCL has been maintaining comfortable coverages, both in debt service accounts (DSA) and DSRAs. For the NCD series one until October, average quarterly DSA cover was 1.05x and DSRA was 1.03x. Similarly for series two, the DSA cover was 1.05x and DSRA was 2.90x as the DSRA requirement is of two quarters.
UPPCL is allowed to park unutilised funds in escrow accounts and the DSRA in fixed deposits of scheduled commercial banks with a minimum credit rating of AA and or in liquid mutual funds having the highest possible investment-grade rating.
While some amounts are invested in the bonds of central public sector entities which are rated at par with the sovereign, the balance is in fixed deposits of scheduled commercial banks.
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