Want the company to provide a fixed asset as collateral to hedge a Rs 8,000-crore foreign exchange loan.
Massive defaults in foreign exchange derivative contracts owing to the unexpected strengthening of the rupee in 2007-08 have prompted lenders to ask Tata Power to provide a fixed asset as collateral to hedge a Rs 8,000-crore foreign exchange loan.
This is the first major deal of its kind. Derivative contracts in India typically did not require collateral until several companies refused to honour their commitments towards hedging by the private sector banks on the ground that they were lured by the banks to sign complex agreements.
Tata Power is raising a forex loan of $1.8 billion through the external commercial borrowing (ECB) route to finance its Rs 19,000-crore, 4,000 Mw ultra-mega power project at Mundra in Gujarat, for which it achieved financial closure in September 2008.
Banking industry sources said that Tata Power is negotiating with HSBC to hedge the loan, which will entail an interest obligation of Rs 453 crore.
To provide the collateral, Tata Power is seeking permission from banks that have already extended term or working capital loans and against which assets have been hypothecated to share the collateral on a pari passu basis (that is, with equal right to payment) with the forex hedge provider.
So far, State Bank of India (SBI), one of the main lenders to the project, has given Tata Power sanction to share the hypothecation.
A senior banker involved in the transactions said, “We are looking at mitigating the risk. It will set the trend for other companies also.”
Asked about the deal with HSBC, a Tata Power spokesperson said, “As a policy, we do not comment on the individual transactions. The gains or losses arising out of any forex hedging, if any, are reported according to applicable accounting and reporting standards and are also reflected in our consolidated financial results.”
He, however, added that it was accepted practice to offer project security to a hedge provider on the same terms as those offered to other lenders to the project.
The practice of asking for collateral against loans gathered momentum after October last year, when the Reserve Bank of India had said non-payment of dues on a derivative contract beyond 90 days would turn all other funded facilities extended to a client into a non-performing asset (NPA).
Subsequently, the central bank clarified that non-payment of dues on contracts made between April 2007 and June 2008 had to be classified as a separate account, but the client would continue to be classified as an NPA.
The financing plan for Coastal Gujarat Power Ltd (CGPL), the company that is implementing the power plant, comprises equity of Rs 4,250 crore, ECBs of up to $1.8 billion and rupee loans of up to Rs 5,550 crore.
