Fitch Ratings has today revised the Outlook on India-based Brahmani River Pellets Limited's (BRPL) National Long-term rating of 'BB+(ind)' to Negative from Stable, and simultaneously affirmed its long term debt of INR9.75bn at 'BB+(ind)'.
The Outlook revision takes into account a six month delay in BRPL's project completion timeframe which reduces the cushion available for debt servicing, with principal repayments expected to commence from 1 October 2010. Other areas of concern include the significant deterioration in the performance of its sponsor and the risks on the sponsor's ability to contribute additional equity to meet any potential cost overruns, if any.
The project delay stems primarily from delays in land acquisition, which is a pre-disbursement condition; subsequently, this led to the first loan disbursement being delayed. To mitigate cash flow issues, sponsors brought in their upfront equity contribution in December 2007. Yet, impacted by the initial local issues in setting up large projects in Orissa and impeded by the lack of a continuous flow of funds, the project activities did not gather momentum until July 2009 when the first fund-based disbursement of loans was made by the lenders. Hence the project execution was delayed, postponing the Commercial Operations Date (COD) by six months. Although BRPL's request to lenders to reschedule the COD from 1 October 2009 to 1 April 2010 has been accepted, this meant that the buffer between the COD and the date it has to start repaying its loans has effectively been reduced to six months from a year.
Fitch, however, draws comfort from the fact that no cost overruns have been incurred thus far. BRPL has completed the land acquisition for its slurry pipeline and pellet plant, and acquired close to 60% land for its beneficiation plant. That said, the progress in its pellet plant and beneficiation plant has been less than 35%, with work in its beneficiation plant running behind schedule. As per the lender's independent engineer, Mecon Ltd's project assessment report updated in May 2009, mechanical completion of the project is likely to be completed by mid March 2010.
The economics of the project remain intact and although BRPL's debt service coverage ratio may suffer as a result of project delays in the first year and a sharp correction in prices over the past year, the impact is likely to be mitigated by the company's ongoing contracts on both the supply and the end product side. Fitch has done a sensitivity analysis on BRPL's projected cash flows with significantly higher iron-ore prices and lower capacity utilisation levels, and the debt servicing continues to remain robust at an average of over 1.3x.
Fitch expects to revise the Outlook back to Stable in the next 12 months, monitoring key issues such as the execution and stabilisation of the project, as well as the performance of its parent Stemcor Holdings Limited's (SHL) and its ability to meet cost overruns, if any. However, the rating could be impacted severely in the event of further delays and resulting cost overruns in the project, as well as continued deterioration of its parent's financials.
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