February 10, 2017 / 11:36 AM / a year ago

Fitch Rates India's Rural Electrification Corp's MTN Programme 'BBB-'

(The following statement was released by the rating agency) HONG KONG, February 10 (Fitch) Fitch Ratings has assigned Rural Electrification Corporation Limited's (REC; BBB-/Stable) USD1bn medium-term note (MTN) programme a final rating of 'BBB-'. Notes issued under the programme may be in any currency or of any tenor. The net proceeds from each issue will be used for funding power-sector infrastructure. The assignment of the final rating follows the receipt of documents conforming to information already received. The final ratings are in line with the expected ratings assigned on 22 December 2016. KEY RATING DRIVERS The programme's rating is aligned with REC's Issuer Default Rating on the basis that the notes issued under the programme will constitute REC's direct, unconditional and unsecured obligations rank pari passu with all its other present and future outstanding unsecured and unsubordinated obligations. REC's ratings are equalised with those of the Indian sovereign (BBB-/Stable). This reflects its public-sector status, ownership by the government of India and strong strategic state ties that result in a strong likelihood of extraordinary state support being provided if needed. REC is therefore classified as a credit-linked public-sector entity under Fitch's criteria. REC is a public financial institution that provides funds exclusively to the Indian power-sector and is the sector's second-largest lender. The state has appointed REC as the sole central agency to implement two nationwide power reform projects aimed at increasing electricity coverage in rural areas and subsidising electricity distribution projects. The Indian government owned 60.64% of REC as at 31 December 2016 and has provided support by allowing REC to issue tax-free bonds and 54EC Capital Gains Tax Exemption Bonds. Fitch expects REC to continue receiving state support. The state controls REC through its board and the Ministry of Power signs yearly memorandums of understanding with REC to set annual operational and financial performance targets, which it reviews quarterly. The Comptroller and Auditor General of India annually appoints statutory auditors for REC. REC's capital adequacy ratio was 20.38% at the end of the financial year to March 2016 (FYE16), higher than the 15% regulatory requirement. REC's healthy profitability is underpinned by its comfortable interest spread and lean operating cost structure. Fitch expects REC's net profit to increase by 15%-20% a year during FY17-FY19, driven by our forecast of 10%-15% annual growth in outstanding loans and the company's ability to maintain its interest spread at the current level. At FYE16, 85% of REC's outstanding loan portfolio was extended to state power utilities. The financial performance of state power utilities has improved in the past two years, as the state has raised electricity tariffs and launched a financial restructuring package. Concentration risk arises from REC's exposure to the power sector. However, this risk is mitigated by state guarantees for the part of the loans extended to state utilities, the use of escrow accounts and the critical role REC plays in providing infrastructure financing to borrowers. RATING SENSITIVITIES Positive rating action would stem from a similar change in the ratings of the sovereign, in conjunction with continued strong state linkage. Significant changes to REC's legal status that lead to a dilution of state control or a deterioration in the likelihood or timeliness of state support may lead to the ratings being notched down from the sovereign's ratings. Further dilution in the state's shareholding to less than 51% would lead Fitch to rate REC on a standalone top-down basis, which could result in a downgrade. Rating action on REC would lead to similar action on the proposed MTN programme and any notes issued under the programme. Contact: Primary Analyst Terry Gao Director +852 2263 9972 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Jean Luo Associate Director +852 2263 9952 Committee Chairperson Vladimir Redkin Senior Director +7 495 956 9901 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Date of Relevant Rating Committee: 21 December 2016 Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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