India Infrastructure Finance Co. Ltd. Rating Affirmed At 'BBB-'; Outlook Remains Stable

S&P Global Ratings

S&P Global Ratings affirmed its 'BBB-' long-term issuer credit rating on Indian Infrastructure Finance Co. Ltd. (IIFCL). The outlook remains stable.

The rating on IIFCL, which facilitates the financing of selected Indian infrastructure projects, reflects the company's position as a key agency of the Republic of India (unsolicited, BBB-/Stable/A-3), and is based on our view of an almost certain likelihood of timely extraordinary support from the Indian government to meet its debt obligations in case of financial stress. We have therefore equalized the rating on IIFCL with that on the sovereign.

We base our assessment of an almost certain likelihood of extraordinary government support on our assessment of the following IIFCL characteristics:

Its critical role as the entity responsible for providing long-term financing for viable infrastructure projects. Infrastructure is vital to supporting India's economy, given the country's size and level of development.

Its integral link with the Indian government via 100% sovereign ownership, government appointments to the board of directors, strategies, and borrowing through operational and financial performance targets. The sovereign also provides regular capital injections, guarantees and permits it to issue tax-free bonds. Employee remuneration is determined in accordance with civil service protocols and India's auditor general is responsible for auditing IIFCL's annual accounts, which are then presented to parliament.

We do not assign a stand-alone credit profile to IIFCL as we view the likelihood of government support as almost certain. In addition, we do not believe government support is currently subject to transition risk. IIFCL executes strategic governmental policies and is largely used as a vehicle to implement government policy.

IIFCL's policy role and operating conditions are spelt out in the government's "Scheme For Financing Viable Infrastructure Projects Through A Special-Purpose Vehicle Called The India Infrastructure Finance Co. Ltd." (SIFTI). IIFCL's loans cannot exceed 20% of total project costs under its Direct Lending Scheme, but in the case of the Takeout Finance Scheme, it can go up to 30% of the project cost (inclusive of Direct Lending). The company can only fund commercially viable projects and these projects are typically set up with funds from other specialized institutions and via capital markets. We believe IIFCL's activities signal the critical role the government sees itself as providing in helping to achieve faster financial closure for infrastructure projects.

However, in our view, the lack of predictability stemming from IIFCL's relatively short track record and the possible uncertain long-term viability of its public policy mandate temper these strengths. We consider that IIFCL's importance could reduce once the Indian capital markets mature and become more conducive to raising long-term capital for infrastructure projects. The government could then reduce, and even potentially withdraw, the guarantees it currently extends under SIFTI. The governments' guarantee facilities are reviewed every five years, or earlier if required.

Nevertheless, IIFCL's current integral links to the central government are evident. The company is the first and only institution that is allowed to tap the country's foreign exchange reserves. The Reserve Bank of India (RBI) can lend up to US$5 billion to IIFCL (UK) with a government guarantee. These funds are then lent to Indian infrastructure companies for importing capital goods for projects in India.

IIFCL follows regulatory norms applicable to nonbank finance companies (NBFCs) as stipulated by the RBI. IIFCL's capital adequacy has been comfortable at more than 19% against a stipulated 12% that the RBI imposes for IIFCL, which is below the 15% norm set for most other NBFCs. IIFCL has been fairly cautious in raising debt and its debt-to-equity ratio is less than 5x, against a stipulated maximum of 7x.

The government provided significant guarantees to IIFCL during its initial years and currently guarantees about half of IIFCL's borrowings. The maximum amount of guarantees that IIFCL can draw upon depends on its funding requirements after consultation with the Ministry of Finance at the beginning of each fiscal year. The government has also consistently injected capital into the company since its inception. Following an Indian rupee (INR) 1 billion capital injection in May 2017, the total paid-up capital stood at INR41 billion. IIFCL's borrowings are incorporated into the Indian government's balance sheet.

IIFCL's loan portfolio has a concentrated exposure to the infrastructure sector and is curtailed because of the company's limited history. IIFCL's profitability declined in the financial year ending March2017 (April 2016-March 2017), with return on average assets dropping to 0.1% from 1.1% in 2016 due to an increase in loan write-offs as well as IIFCL adopting accelerated provisioning. Loan write-offs were largely tied to delays, and environmental and legal challenges on key infrastructure projects. Systemwide, nonperforming loans in India have been relatively high in recent years because a number of infrastructure and industry projects have faced difficulties. We expect asset quality to remain a key variable that may continue to affect IIFCL's profitability.

The stable outlook on IIFCL mirrors the outlook on the sovereign rating on India. It reflects our assessment that there is an almost certain likelihood of extraordinary government support for IIFCL over the next two years because IIFCL is a policy instrument to promote infrastructure financing.

We believe IIFCL will continue to play a critical role in the Indian government's economic development plans and policies, regardless of the government's composition. That said, any sign of a change in IIFCL's policy role, a reduction in government support, or a move to significantly reduce the government's stake in IIFCL could erode the government's obligation or willingness to provide extraordinary support to the company.

The ratings on IIFCL could face downward pressure if IIFCL's role or link with the government diminishes materially. This could occur due to a substantial change in the company's role. We would also lower the ratings on IIFCL if we downgrade the sovereign.

Powered by Capital Market - Live News