Standard & Poor's Ratings Services (S&P) on Friday lowered Tata Power's credit ratings, citing cash flows that are expected to remain weak due to partial recovery of fuel costs at its Mundra plant and lower returns on investments in Indonesian coal companies.
The long-term corporate credit rating of Tata Power has been cut to 'B+' from 'BB-' with a negative outlook, according to S&P. A 'B+' rating indicates relatively higher credit risk.
"We lowered the rating on Tata Power because we believe the company's cash flows are likely to remain weak with a ratio of funds from operations (FFO) to adjusted debt at less than 10% over the next 12 months," Standard & Poor's credit analyst Rajiv Vishwanathan said in a statement.
The main reasons cited for lower cash flows, on a consolidated basis, are less-than-full recovery of fuel costs at the 4,000 MW Mundra project and lower returns from investments in Indonesian coal companies.
"The fully operational Mundra project exposes Tata Power to volatility in coal prices because the company can only pass through a part of fuel costs to its customers. The project's ability to blend fuel with some low calorific value coal tempers the fuel-price risk," the agency said.
The issue rating on the company's outstanding senior unsecured notes due 2017 has been lowered to 'B+' from 'BB-'.
S&P said the Central Electricity Regulatory Commission's order for a full pass-through of fuel costs at the Mundra project is likely to improve Tata Power's cash flows.
"However, the timing and quantum of the tariff remain uncertain. We expect Tata Power's ratio of FFO to debt to be about 7.5 % in fiscal 2014 and rise to 10-14 % in fiscal 2015 if the compensatory tariff becomes effective in 2015," it added.
According to S&P, lenders to the Mundra project are likely to support the project even after the expiry of a waiver on a bank loan covenant breach in June 2013.
Tata Power's weak consolidated cash flows may hamper its ability to pay maturing debt over the next 18 months.
"Tata Power has large bullet debt maturities totalling about $ 670 million due in April 2014, July 2014, November 2014 and April 2015," it added.
S&P said it may lower the rating if Tata Power's liquidity weakens further or if the company faces difficulty in refinancing its debt maturities in a timely manner.