Global ratings agency Standard & Poor's (S&P) Monday said it has lowered its outlook on Tata Power to “negative” from “stable” and might cut the company's rating in the near future if it failed to improve its financial situation.
“The outlook revision reflects our expectation that Tata Power's cash flow and financial risk profile could deteriorate over the next six to nine months because the company has breached a debt-to-equity ratio covenant on loans to its Mundra project," Standard & Poor's credit analyst Rajiv Vishwanathan said in a statement.
Due to unfavourable debt-to-equity ratio the availability of loans to Mundra project, which Tata Power's 100 percent-owned subsidiary Coastal Gujarat Private Limited controls, could therefore be limited.
Standard & Poor's affirmed 'BB-' long-term corporate credit rating and 'BB-' issue rating on the company's senior unsecured notes.
However, Standard & Poor's said it might cut its rating on Tata Power if “the company is unable to secure a waiver from its lenders on the breach of covenant” or there is “an increase in expenditures due to the Mundra project or otherwise”.
In these situation, Tata Power's financial risk profile would substantially weaken, it said.
The Mundra project also exposes Tata Power to a risk that coal prices could increase because the company can only partially pass through fuel costs to customers.
“Tata Power's stakes in coal companies provide a natural hedge to higher coal prices and support its cash flows. Nevertheless, the hedge does not fully eliminate the company's exposure to coal price volatility,” Standard & Poor's said.
Tata Power is negotiating with bank lenders a mechanism to include the cash flows from the coal companies in the calculation of financial covenants for the Mundra project.