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C. Shivkumar

BANGALORE, March 13

POWER financiers Rural Electrification Corporation Ltd (REC) and Power Finance Corporation (PFC) have indicated their willingness to fund unbundled power entities provided they conform to credit covenants.

REC and PFC are registered non-bank finance companies that come under the Ministry of Power. REC exclusively finances transmission and distribution projects in the rural areas. PFC finances generation, transmission and distribution projects.

PFC has already begun financing private sector generation companies under consortium financing arrangements. REC funds State-owned utilities alone because transmission and distribution are operated by State Government undertakings, with the exception of Orissa which has privatised power distribution.

Sources said that such funding would only be available to new entities. There would be no change in the covenants on previous loans extended on the strength of either assignment of revenue circles, or of State Government guarantees.

The new covenants to be applied for funding, transmission and distribution investments would be based entirely on commercial terms. This implies that both REC and PFC would have physical asset cover to the extent of 150 per cent of the loan value. Further, these entitities would have to conform to the stipulated debt service coverage ratio (DSCR) norms.

The DSCR norms applicable to commercial funding is that the net cash flows would have to be at least 1.5 times the debt service payment. This ratio indicates the borrower's debt carrying capacity. The sources said that borrowers failing to meet these criteria would have to provide credit enhancements, which could include State Government guarantees or take the form of assignment of receivables from the designated revenue circles.Both PFC and REC currently fund projects exclusively on the strength of unfunded State Government guarantees.

As for their old loans, REC has carried out a two per cent reduction in interest rates, while PFC is expected to follow suit. These reductions are expected to help the State utilities reduce their interest costs. However, the reductions do not imply any change in the covenants for the outstanding loans to State utilities.

The sources said, even after complete privatisation, the onus of ensuring prompt debt servicing would be the responsibility of the State Governments, provided these loans were guaranteed by the respective State Governments.

The institutions have, however, ruled out any capitalisation of outstanding debt service dues from the State utilities. Some of the States have already proposed converting some of the outstanding loans into equity as part of the power sector reform effort.

The equity conversion is being done to ensure that the unbundled entities are freed of debt, giving the State utilities a temporary reprieve. "The business of equity financing will remain with the State Governments or the promoters. We will function as debt financiers only,'' they added.

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