No change in APAC thermal projects’ ratings: Fitch

Fitch Ratings said that ratings for Asia Pacific (APAC) thermal power projects will remain unaffected by the coronavirus pandemic.

The ratings cover four thermal power projects in Asia, including Lalitpur Power Generation Company Ltd’s (LPGCL) super critical thermal power plant in Uttar Pradesh.

LPGCL is rated ‘BB+’ and stable. The others are Indonesian power producer Minejesa Capital BV and PT Lestari Banten Energi (LBE), both rated ‘BBB-’ with stable outlook. Vietnam-based Mong Duong Finance Holdings BV (MD2) is rated ‘BB’ with positive outlook.

Insulated from volatility

Fitch explained that these projects benefit from take-or-pay obligations under the long-term power purchase agreements, which insulate them from price volatility and demand shocks. A slowdown in economic activities due to the pandemic will soften power demand, but will not affect the capacity charges or fixed charges that these projects receive, it said.

These charges are the key sources of cash that the projects use to service debt, as the payment is based on the availability of the power station regardless of the dispatch.

Another factor that augurs positively for these power projects is the sourcing of coal. All these projects source coals from domestic mines. Paiton and LBE have multiple coal suppliers whereas MD2 and LPGCL procure coals from Vinacomin and Coal India Ltd, respectively, each of which is the state-owned monopoly in their countries, noted Fitch. Coal stocks at power plants in India is 41.8 million tonne, equivalent to 24 days’ consumption, as of March 26, 2020.

Further, Fitch expects the governments to ensure mining activities are not disrupted by the outbreak to continue the domestic supply of coal, which is important to electricity generation. All the issuers also maintain sufficient coal inventory on site in case of short-term disruption to supply. Fitch also believes these issuers have robust spare-part management to ensure adequate stocks and have the ability to reschedule maintenance if necessary.

In addition, these plants have been in talks with their off-takers and regulators on preventive measures and emergency plans in response to the coronavirus outbreak.

Debt servicing

Also, Fitch currently does not see any threat to these projects’ ability to service debt. “All the notes and loans are fully amortising, which removes refinancing risk. The notes pay fixed-rate interest and have project finance-style features, such as debt servicing and maintenance reserves, currency hedging, and other structural enhancements, which mitigate potential cash flow volatility,” it said.

Fitch believes governments are unlikely to order a shutdown of power stations during the pandemic even under a full lockdown, as the supply of electricity is classified as an essential service.

However, Fitch cautioned that although it does not foresee any immediate rating actions, downgrades in the ratings of their counter-parties or their respective sovereign’s country ceilings, could prompt rating action on the rated notes.

Country ceilings capture the risk of capital and exchange controls that would prevent or significantly impede the private sector’s ability to convert local currency into foreign currency and transfer the proceeds to non-resident creditors.

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