18 June 2016 Current Affairs: Moody's has revised to negative from stable the outlook on the Ba3 corporate family rating and senior unsecured rating of Tata Power following the announcement that the company has signed a share purchase agreement to buy Welspun Renewables Energy for Rs 9,250 crore.
Tata Power's Ba3 ratings include a one-notch uplift based on the assessment that Tata Power will likely receive support from its major shareholder, Tata Sons Ltd,(unrated), if needed.The ratings could revert to stable if Moody's considers that the terms of the bridge finance do not exert material credit and liquidity pressure on the rating, and the quality of assets being acquired are not materially weaker than those of Tata Power.
The change in outlook to negative reflects the combined effect of 1)entirely debt-funded nature of the transaction, which reduces headroom within the ratings, 2) uncertainty regarding the terms and structure of the bank debt that will be raised to fund the acquisition, and 3) limited details about the quality of the assets being acquired," says Abhishek Tyagi, a Moody's Vice President and Senior Analyst. However, he notes that with this acquisition, Tata Power's debt will increase by approximately 21%, thereby reducing the headroom within the rating.
Moody's notes that the acquisition provides meaningful diversification benefits to Tata Power's business profile with the increase in renewable projects in its portfolio which also have long term power purchase agreements.
Tata Power's renewable energy portfolio nearly doubles with this acquisition and would represent approximately 23% of its generation capacity which is in line with its spelled out long term strategy of portfolio fuel mix.
The ratings could be also lowered if Tata Power raises its financial leverage further, leading to financial metrics exceeding the ratings tolerance, including (3) FFO interest coverage falling below 1.3x to 1.4x, adjusted debt/ book capitalization exceeding 75%, and RCF/debt dropping below 3.5% to 4.5% on a sustained basis.
Furthermore, the ratings could be pressured if Coastal Gujarat Power Limited (CGPL) -- which is a subsidiary of Tata Power fails to obtain waivers on its covenant breaches within a reasonable timeframe, and without significant additional costs or onerous new terms.