Downgrade to hit Maharashtra bond issues

The bond issue of Maharashtra Power Development Corporation (MPDCL), the special purpose vehicle which has been raising funds for various power projects in the state, is also likely to be affected. The holding company has beenconsidering fresh borrowing to part-finance several power projects of Maharashtra State Electricity Board and also pick up an equity stake in the second phase of Dabhol Power Company (DPC).

Considering the worsening financial position of the state, the government guarantee does not provide any comfort to investors. “The downgrading by Crisil has further depressed investor sentiment. This will make the future debt instruments of the government more expensive and would have to offer a higher coupon on its bonds,” said a senior banker, “the government will have to hike the interest rate to get good investor response for these issues.”

As is the practice the world over, Indian investors have also started looking at the rating before putting funds. When global rating agencies like Moody’s and Standard & Poor’s downgraded India last year, inflow of funds from abroad came down. “When a company is downgraded, it will have to offer higher interest rates to attract the investors. But the higher interest ratewill add to the debt servicing problems,” banking sources said. “Crisil’s downgrading is an indicator that the financial position of the state has considerably weakened,” bankers said.

Earlier, investment in government guaranteed instruments was considered safe because it did not have a large exposure, he said. The state government has been floating a series of debt instruments through various special purpose vehicles, launched for investments in different sectors. This has increased the state government’s liabilities in the last two years.

In Maharashtra, funds marked for a capital outlay are being increasingly used for bridging the revenue deficit. While the state government will not be deterred from raising funds following the downgrade, there will be a higher price to be paid. The growth in Maharashtra’s revenue expenditure has been higher than that of its revenue receipts on account of rising debt servicing and administrative expenditure. This has necessitated deployment of capital surplusestowards funding of current expenditure, which has reduced asset creation in the state.

Crisil findings