Long Term Corporate credit rating of Tata Power limited has been reduced from BB to B+ by Standard & Poor's Rating Services. The outlook is negative.
Further, the issue rating on the company's outstanding senior unsecured notes due 2017 has been lowered from BB- to B+ as according to Standard & Poor's, the company's cash flows are likely to remain weak with a ratio of funds from operations (FFO) to adjusted debt at less than 10% over next 12 months.
According to the Standard & Poor's, the primary drivers for Tata Power's lower cash flows on a consolidated basis are less-than-full recovery of fuel costs at a 4,000 megawatt coal-fired project at Mundra and lower returns from investments in Indonesian coal companies because of substantially reduced thermal coal prices.
The fully operational Mundra project exposes Tata Power to volatility in coal prices because the company can only pass through a part of fuel costs to its customers. The project's ability to blend fuel with some low calorific value coal tempers the fuel-price risk.
India's Central Electricity Regulation Commission (CERC) recently issued an order for a full pass through of fuel costs at the Mundra project. A committee set up by CERC also recommended a mechanism for payment of a compensatory tariff to recover fuel-cost related losses at the project.
These measures are likely to improve Tata Power's cash flows. However, the timing and quantum of the tariff remain uncertain. We expect Tata Power's ratio of FFO to debt to be about 7.5% in fiscal 2014 and rise to 10%-14% in fiscal 2015 if the compensatory tariff becomes effective in 2015.
As said by the S&P
"We believe lenders to the Mundra project are likely to support the project despite the expiry of a waiver on a bank loan covenant breach in June 2013. We assess Tata Power's liquidity as ""less than adequate,"" as our criteria define the term. Tata Power's weak consolidated cash flows are likely to weaken its ability to pay maturing debt over the next 18 months. Tata Power has large bullet debt maturities totaling about US$670 million due in April 2014, July 2014, November 2014, and April 2015. We believe the company might undertake measures to meet its funding requirements,
The negative outlook reflects the uncertainty regarding the company's plan to refinance its debt maturities over the next 12-18 months, The outlook also reflects uncertainty regarding approvals for the tariff relief at Mundra.
We may lower the rating if Tata Power's liquidity weakens further or if the company faces difficulty in refinancing its upcoming debt maturities in a timely manner. A downgrade could also follow a further deterioration in cash flows, such that the ratio of FFO to debt reduces to 5%-7% on a sustained basis. We believe this could occur if coal prices decline further or remain low for a sustained period, or if approvals for the tariff relief are not available beyond 2015.We may revise the outlook to stable if Tata Power has a concrete plan to meet its upcoming debt maturities; eliminates its bank loan covenant breaches; and faces no material deterioration in its business."
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