Samp;P affirms BB8217; rating on PFC

LONDON, NOV 12: Standard amp; Poor's Samp;P on Friday affirmed its double-B' long-term foreign currency corporate credit rating on P...

LONDON, NOV 12: Standard amp; Poor8217;s Samp;P on Friday affirmed its double-B8217; long-term foreign currency corporate credit rating on Power Finance Corp PFC and its double-B8217; rating on PFC8217;s 100 million senior unsecured floating-rate notes due in 2006. At the same time, Standard amp; Poor8217;s affirmed its single-B8217; short-term foreign currency rating on PFC. The outlook on the long-term rating remains stable.

PFC8217;s ratings reflect risks in its asset profile, the company8217;s increasing exposure to foreign currency and interest rate risks, and its aggressive asset growth targets that are expected to outpace the growth of its capital. Strengths that offset these risks include its sound profitability, strong capitalisation, and important role in India8217;s power sector. Support from the Government of India enhances PFC8217;s creditworthiness. PFC8217;s foreign currency rating reflects the credit risks associated with the sovereign foreign currency rating on the Republic of India.

PFC is a government of India-owned financialinstitution that lends to power sector concerns in India, mainly state electricity boards SEBs. The company8217;s asset quality is vulnerable to the poor creditworthiness of its SEB clients and their owner state governments. PFC has attempted to mitigate this risk by well securing its assets through state government guarantees and escrow account arrangements, which give the company preferential first charge on SEB revenues. However, Standard amp; Poor8217;s believes that over the long term, PFC8217;s asset quality can be sustained only if the financial health of the SEBs improves. The company8217;s lending to private-sector power projects diversifies its borrower profile, but exposes it to a higher-risk asset class.

PFC8217;s access to low-cost and long-tenor borrowings from domestic markets has lessened, while its exposure to foreign exchange and interest rate risks have increased, though its hedging strategies offset currency risk to some extent. However, its ambitious growth target of over 30 per cent annually could reduceits currently high financial flexibility, if internal capital growth does not meet expectations. PFC8217;s profits have doubled over the last two years, partly due to its successful restructuring of some non-performing loans to yield cash. The company8217;s return on assets of 5.9 per cent in fiscal 1999 is above-average.