(The following statement was released by the rating agency)
Nov 29- Fitch Ratings has assigned India-based SV Power Ltd.’s (SVP) INR1,940m senior project loans a National Long-Term rating of ‘Fitch BB-(ind)’. Fitch has also assigned SVP’s INR140m subordinate debt a National Long-Term rating of ‘Fitch B+(ind)’. The Outlook is Stable.
The ratings are constrained by the underlying fuel risk both in terms of supply and price. The project will use a blended feed stock of washery rejects (70%) and raw coal (30%), sourced from coal washery and the e-auction window of South Eastern Coal Fields, respectively. Risks arising from the lack of a firm supply agreement for coal washery rejects is somewhat mitigated by the project’s presence in a mining hub and strong regulatory support. The Ministry of Environment and Forest regulation has mandated coal-based power plants located beyond 500km from coal mines to use beneficiated coal, with ash content not exceeding 34%.
The ratings are also constrained by the lack of firm contractual arrangements for power sale, which exposes the project to off-take and price risks. While India’s current power deficit scenario may ensure adequate demand for the power generated by the project, the steadily declining merchant power prices and its volatility pose a significant risk. Fitch’s base case assumes sale of power at INR3.75/kwh, and any significant correction in prices could affect the project’s credit quality.
There has been a significant cost overrun of 40.6% from the initially planned cost of INR2,880m. This is largely due to increased engineering, procurement and construction costs for the change in the power plant design capacity to 63MW from 56MW and high interest costs during construction.
However, the cost overrun has been bridged by an INR800m unsecured loan extended by group companies and an INR370m unsecured loan (not rated) extended by a financial institution. Management expects the power plant to be fully commissioned by end-November 2011 after a delay of 11 months.
Fitch expects the sponsor to absorb the impact of further cost overruns, if any, and to extend marginal support in FY12 for debt servicing, in case of a cash flow shortfall. Cash flows are sensitive to reductions in power tariffs and a sharp rise in the price assumptions for both coal washery rejects and raw coal - a possibility given India’s acute coal shortages.
Positive rating action may result if the project obtains a long-term contract for coal washery rejects and a power purchase agreement, ensuring long-term off-take of power at favourable tariffs.
SV Power was set up by the Hyderabad-based KVK group to implement a project consisting of a 2.5mtpa coal washery and a 63MW washery reject-based power plant, KVK has a decade-long experience in operating power plants based on natural gas, rice husk plus coal, low sulphur heavy stock and hydel power.