India Ratings & Research (Ind-Ra) has rated India's first utility tariff-backed debt programme. It has assigned Reliance Infrastructure (R-Infra) proposed Rs 27.25 billion utility tariff-backed debt programme an expected rating of 'AA(SO)(exp)'.
The rated facility consists of non-convertible debentures and long-term loans, secured against regulatory asset collection (RAC). The key collateral is the first and exclusive charge of investors on the proceeds of RAC from R-Infra's Mumbai electricity distribution business.
The regulatory asset was worth Rs 33.8 billion (including carrying cost) as on Mar. 31, 2013 and has been approved by Maharashtra Electricity Regulatory Commission in its order dated Aug 2013 for the Mumbai distribution business of R-Infra.
The rating of the debt programme has been notched up from R-Infra's long-term issuer rating of 'AA-', mainly on account of in-built structural credit enhancements in the debt programme. The utility nature of the underlying business, identified stream of unencumbered cash flow and limited commingling risk provide strength to the debt servicing ability of the debt programme. For a detailed press release and the underlying factors for the rating, please click here.
Utility tariff-backed debt securities are common in jurisdictions with matured debt markets such as Europe and the US. The current issuance of R-Infra has similarities, in terms of collateral, with Spanish electricity tariff deficit securitisations, with several such transactions being rated by Fitch Ratings in Spain. In the US, Fitch rates 36 utility tariff asset-backed securitisations with total initial principal of USD 21.6 billion. The analytical framework of the current debt programme of R-infra is drawn from Fitch's criteria ‘Rating Criteria of U.S. Utility Tariff Bonds', dated Dec. 18, 2013.
Given the huge funding requirement for India's infrastructure, such transactions provide another avenue for issuers to monetise future cash flows. Investors may draw comfort from structural credit enhancements that reduce credit risk to an extent that even a financial default by the issuer on other financial obligations will have limited impact on the debt servicing ability of such securities so long as the issuer continues its operations as a going concern. While such bonds, as an asset class, have globally shown reasonable resilience to cyclical downturns and severe economic crises, they are more susceptible to regulatory risks.
