Standard & Poor's today lowered the credit rating outlook of Tata Power to 'negative', citing financial issues related to the company's 4,000 MW Mundra ultra mega power project.
Global rating agency S&P revised downwards Tata Power's outlook to 'negative' from 'stable'.
"The outlook revision reflects our expectation that Tata Power's cash flow and financial risk profile could deteriorate over the next six to nine months because the company has breached a debt-to-equity ratio covenant on loans to its Mundra project," S&P credit analyst Rajiv Vishwanathan said in a statement.
He noted that availability of loans for the Mundra project could "therefore be limited".
Covenant refers to an agreement between two parties.
The flagship Mundra UMPP, located in Gujarat, is being implemented by Coastal Gujarat Private Ltd (CGPL) -- a wholly-owned subsidiary of Tata Power.
According to S&P, outcome of Tata Power's negotiations with lenders on the technical breach in the loan covenant is yet to be finalised.
"In the absence of the waivers, CGPL will not be able to avail of the loan facility once its drawdown reaches the currently approved level of 83% of the project facility," the statement noted.
Nevertheless, "we understand that current disbursements from project facilities have not been curtailed," the rating agency pointed out.
S&P said in its view, Tata Power was likely to receive waivers from lenders to the project.
Meanwhile, S&P has maintained Tata Power's long-term corporate credit rating as well as issue rating on its senior unsecured notes at 'BB-'
'BB' generally indicates less vulnerability in the near- term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
"In our view, limited availability of project loans will increase Tata Power's project expenses because the company is likely to fund the construction of the remaining units of the Mundra power plant," Vishwanathan said.
This also increases the uncertainty over the timing of commissioning of some units of the power project, he added.
On the other hand, S&P noted that it could lower the company's rating if Tata Power is unable to get a waiver from lenders on the breach of covenant, among other factors.
S&P said it may revise Tata Power's outlook to 'stable' if the company secures necessary waiver and construction at Mundra continues as planned, among others.
The first unit of Mundra UMPP was commissioned in March and the second 800 MW unit is expected to be commissioned in August.
S&P said that Mundra project exposes Tata Power to risks related to coal prices, since the company can only partially pass through fuel costs to customers. Mundra UMPP is fired by imported coal.
"Tata Power's stakes in coal companies provide a natural hedge to higher coal prices and support its cash flows. Nevertheless, the hedge does not fully eliminate the company's exposure to coal price volatility," the rating agency added.
As per the rating agency, Tata Power is negotiating with bank lenders a mechanism to include the cash flows from the coal companies in the calculation of financial covenants for the Mundra project.
Tata Power has booked impairment charges related to CGPL assets on account of sharp depreciation of rupee against the US dollar over the past 12 months.
"The currency depreciation has also increased CGPL's foreign currency debt. The reduction in CGPL's equity and its higher debt resulted in the breach of the debt-to-equity ratio covenant," S&P noted.
