Mega power projects may generate mega credit risks: CRISIL

11 December 2006

In an effort to promote private investment in the power sector, the government of India (GoI) has formulated the concept of 'ultra mega power projects (UMPPs). These UMPPs have the potential to impact the credit profiles of the sponsors over the medium term, says top Indian rating agency, CRISIL.

The project costs of Rs150 billion-170 billion are large, and the proposed ratio of debt to equity is high, in the context of the bidders' balance sheets. In addition, the funding of the projects' equity components will stress sponsors' financial flexibility, and there are risks inherent in the funding and implementation of such long-gestation projects.

Seven UMPPs, of 4,000 MW each, are currently on the anvil. Project-specific SPVs set up by government will carry out initial developmental activities, such as acquiring land and obtaining initial consents. The central government will select developers (sponsors) for setting up the projects, through a process of international competitive bidding; ownership of the SPVs will then be transferred to the respective sponsors.

UMPP projects are estimated to cost in the region of Rs.150-170 billion, with possible debt:equity ratios of 70:30. This will result in substantial amounts of debt: an individual SPV could need to borrow as much as Rs120 billion. For CRISIL-rated sponsors, the rating implications of these projects could be significant.

Though the projects will be undertaken through special purpose vehicles (SPVs), there will normally be strong reasons for consolidating the debt residing in these SPVs with that of the sponsors. To rate the impact of these UMPP projects on rated sponsors' CRISIL has chalked out a new rating analysis.