S&P upgrades Power Finance Corp to ''BB+''; Outlook Stable

Mumbai: Standard & Poor's Ratings Services has raised its long-term foreign and local currency issuer credit ratings for Power Finance Corp. (PFC) Ltd. to 'BB+', from 'BB'. The outlook is stable.

Power Finance Corp. Ltd. is the primary government agency for financing the electricity sector in India. It is the largest lender to most state government-owned electricity utilities, which generate about 60 per cent of electricity in India and are the country's main electricity distribution and retail agencies.

The rating upgrade reflects Standard & Poor's opinion concerning the strength of support from its sole owner, the government of India (BB+ / Stable / B), based on the company's role as the main
government agency for financing the electricity sector. In addition, PFC has a public policy role in implementing government policies on electricity sector reform and development.

"Given the economic and political importance of the electricity sector and PFC's critical role, Standard & Poor's believes the Indian government is likely to provide funding support to PFC should it encounter difficulty in servicing its debt obligations," said Agost Benard Standard & Poor's credit analyst. PFC's credit quality is therefore closely linked to the sovereign because of the high priority given to the electricity sector and to its reform by the government of India.

Nevertheless, the ratings on PFC also derive support from a favorable capitalization level, with common equity at 20.8 per cent of total assets at March 31, 2005. PFC has faced a low level of overdue payments and insignificant credit losses. Besides some improvement in credit risk assessment and monitoring, this has been largely on account of PFC's status as "preferred lender" by the financially weak state electricity utilities. The company's profitability has also been relatively robust, with net income at 5.1 per cent of average assets in the past five years to fiscal 2005.

The ratings on PFC are constrained by weak asset quality and borrower concentration. PFC's main customers, the state governments and their electricity utilities, consistently report operating losses and often face cash flow difficulties resulting in low credit worthiness. PFC's assets are concentrated in the electricity sector, which makes it susceptible to a systemic crisis. Furthermore, its top five borrowers account for about 33 per cent of its total loan assets of Rs 295 billion ($6.6 billion) at March 31, 2005.

The stable outlook reflects that of the sovereign rating. In addition, the outlook takes into account the expectation that PFC's strategic role and its status as a policy instrument of the government of India will prevail in the medium term, implying support from the sovereign, if the need arises. However, a material reduction in the government's ownership of PFC or a major shift in the company's business mix outside its current policy role could result in a rating downgrade on PFC, as either factor could dilute government support.