Standard & Poors has assigned a BB+ long term foreign currency rating to National Thermal Corporation of India (NTPC) with a stable outlook. The foreign currency rating reflects the sovereign credit risks associated with the BB+ foreign currency rating on the Republic of India, said a release issued by Standard & Poors.
An obligation rated BB+ is regarded as having speculative characteristics while a stable outlook indicates that ratings are not likely to change. The rating however indicates least degree of speculation.
There have been some concerns that Indias rating could be affected because of negative impact of imposition of sanctions. The S&P chief, who was in Mumbai recently, had allayed these fears and by assigning the sovereign rating to NTPCs foreign currency, S&P has in a way reaffirmed the BB+ rating on India.
S&P has however sounded a note of caution with regard to NTPCs financials and stated that should the creditworthiness of the state electricity boards weaken further and not be addressed through continued assistance from the central government, NTPCs financial position could deteriorate and its rating decline.
The rating is constrained by the chronic credit problems of NTPCs major customers, the state electricity boards, lower than desired utilisation as result of gas supply disruptions and transmission constraints, and potential competition as independent power projects come on line.
On the positive side, the rating reflects the companys strong market position, a favourable regulatory regime, support from the government, a good track record constructing and operating thermal power plants and an adequate financial profile.
S&P expects NTPC, a 100 per cent government owned whole sale power generator, to adjust its strategies over time in line with the slow transformation of the Indian power sector, viz. entry of independent power producers, state electricity board reforms and regulatory reforms.
NTPC has ambitious capacity expansion plans, requiring significant amounts of new debt and increased leverage beginning in 2000. This represents a change in the companys financial policies and its past reliance upon government guaranteed debt from multilateral development banks and export credit agencies.
S&P expects that the leverage would rise in line with capacity expansion though debt protection measures would not necessarily weaken. S&P has advised that this shift in financial policy would need to be implemented carefully given the increase in business risk associated with industry reform and introduction of competition.
The biggest problem facing NTPC is its accounts receivable with state electricity boards as reflected by the fact that before deducting anticipated central government assistance, state electricity board arrears were about 3.8 months of sale at November 31, 1997.
While deductions for anticipated central government assistance has reduced the arrears to a more manageable 1.6 months of revenues, the creditworthiness of state electricity board remains a chronic problem that may not improve in the short term, and could deteriorate further. S&P believes that the benefit of state electricity board reforms would still be years away.
