This reflects the entity's public sector status, government ownership, and strong operational and strategic ties with the government. PFC is, therefore, classified as a credit linked entity under Fitch Ratings' criteria.
Fitch Ratings has affirmed India-based Power Finance Corporation Limited's (PFC) Long-Term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed PFC's senior unsecured rating and USD1bn senior unsecured medium-term note programme at 'BBB-'.
PFC's ratings are equalised with those of India (BBB-/Stable). This reflects the entity's public sector status, government ownership, and strong operational and strategic ties with the government. PFC is, therefore, classified as a credit linked entity under Fitch Ratings' criteria. The ratings also reflect PFC's healthy financial performance and low delinquency ratio.
KEY RATING DRIVERS
PFC is one of two public financial vehicles that provide funds exclusively to the Indian power sector and is also the largest lender to the sector. The government of India has also appointed PFC as the sole central agency implementing several nationwide power reform projects aimed at reducing the state power utilities' technical and commercial losses and improving their operational efficiency.
The government owns 72.8% of PFC and provides PFC support by allowing it to issue tax-free bonds. PFC's status as an infrastructure finance company allows it to raise foreign commercial borrowing of up to 75% of its owned funds (including foreign currency loans outstanding) or USD750m without prior approval from the Reserve Bank of India. Fitch expects PFC to continue to receive government support.
The Ministry of Power signs annual memorandums of understanding with PFC that set operational and financial performance targets. It reviews these quarterly. The Comptroller and Auditor General of India appoints PFC's auditors annually.
At end-March 2015, 69% of PFC's outstanding loan portfolio was extended to the state power utilities, which inherently have weak credit profiles. Nevertheless, the financial performances of the state power utilities have improved in the past two years because the government has raised electricity tariffs and launched a financial restructuring package for the utilities.
PFC's capital adequacy ratio improved to 20.34% at end-March 2015 (end of the financial year 2015), from 20.10% at end-FY14, and also above the regulatory requirement of 15%. PFC's healthy profitability is underpinned by its comfortable interest spread and lean operating cost structure. Fitch expects PFC's net profit to increase by 20%-25% a year during FY15-16, driven by Fitch's forecast of 20% annual growth in outstanding loans and the company's ability to maintain its interest spread at the current level over the period.
Concentration risk arises from PFC's exposure to the power sector, with the top 10 borrowers accounting for around 43% of its total exposure at end-FY15. However, this risk is mitigated by the guarantees from state governments for part of the loans extended to state utilities, and the use of escrow accounts in the case of state sector borrowers. In the case of private-sector borrowers, security is obtained through, among other things, trust and retention account mechanisms, first priority pari-passu charge-on project assets, collateral, personal/corporate guarantees and the critical role that PFC plays in providing infrastructure financing to its borrowers.
RATING SENSITIVITIES
Positive rating action would stem from a similar change in the ratings of the sovereign in conjunction with continued strong support from the state.
Significant changes to PFC's legal status that would lead to a dilution of control by the government or deterioration in the likelihood or timeliness of support by the sovereign may result in the ratings being notched down from the sovereign ratings. Further dilution in the state's shareholding to less than 51% may lead Fitch to change its approach to the rating to a standalone basis (from the top down), which may result in a downgrade
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