Indian Power Firms Face Cash Crunch After Lender Cut to Junk
India’s electricity projects, already reeling under precarious finances, could see borrowing costs soar.
(Bloomberg) -- A downgrade to junk for an Indian state-run lender to electricity projects risks worsening the cash crunch faced by the nation’s power firms.
Power Finance Corp., India’s top dollar bond issuer in 2019, was cut to BB+ from BBB- by S&P Global Ratings last week, becoming the latest so-called fallen angel that’s dropped below investment grade. Yield premiums on its 3.95% dollar notes due April 2030 surged the most in two months following the downgrade, according to prices compiled by Bloomberg.
India’s electricity projects, already reeling under precarious finances, could see borrowing costs soar if Power Finance isn’t able to access the dollar bond market or raises funds overseas at higher rates due to the rating cut. This threatens to have a knock-on effect on domestic consumers, who may see an increase in power tariffs even as India’s economy is forecast to contract this fiscal year for the first time in more than four decades due to the coronavirus pandemic and a massive lockdown to contain it.
“Power Finance Corp. will find it difficult to tap the dollar bond market, unless they receive an explicit backing from the government,” according to A.S. Thiyaga Rajan, a senior managing director in Singapore at Aquarius Investment Advisors Pte. “With the downgrade, India’s power sector loses a key funding source in the dollar bond market.”
India’s Finance Ministry is examining a plan to relax a regulatory pricing cap on overseas borrowing by local issuers, the Economic Times reported on Friday, citing an unidentified government official. If adopted, the move would expand financing access for companies during the pandemic, according to the report.
The risk of Asia-Pacific corporate bonds becoming fallen angels has increased due to the pandemic, and Indian firms are closely watched because several are government-related issuers whose ratings are tied to the country’s, according to Fitch Ratings. India’s sovereign debt score was cut to the lowest investment level with a negative outlook by Moody’s Investors Service last month.
Power Finance spokespeople didn’t immediately respond to a request for comment. The Indian government has about a 56% stake in the lender.
Funding Crunch
Local power firms increasingly rely on Power Finance and its investment-grade ranked unit REC Ltd. for funding requirements, with local banks becoming more risk averse to lend to a sector fraught with fuel constraints, regulatory red tape and persistent payment delays from power distributors.
At the end of May, 1.15 trillion rupees ($15 billion) in payments from power distributors to generators were overdue, a jump of 80% from a year earlier, according to a portal run by PFC to track payments. Distributors failed to pay as the world’s biggest lockdown caused industrial demand for power to collapse, and interfered with billing and collection.
Power Finance and REC plan to lend 900 billion rupees to power distributors to help make those payments, but the process has been slow as states may be hesitant to guarantee loans because they are already strapped for cash due to the Covid-19 outbreak.
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