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C. Shivkumar

BANGALORE, March 25

THE State Governments' attempts to reduce the debt burden of their respective power utilities have run into trouble, with the Power Finance Corporation (PFC), the Rural Electrification Corporation (REC) and the financial institutions (FI) disallowing prepayments of past borrowings.

Several States led by the southern States - Tamil Nadu, Andhra Pradesh and Karnataka - had approached these institutions for prepaying high-cost loans. The loans taken from PFC and REC were mostly for upgradation of their distribution and transmission lines. But some States had also raised funds from PFC for meeting generation projects. In addition, the State utilities had also taken term loans from FIs including Hudco, ICICI and IDBI for their capital expenditure.

The bulk of these loans taken in the past were at interest rates of over 12 per cent, especially during the last three years, and in some cases at rates as high as 14 per cent. Besides, the utilities had also privately placed bonds with institutions such as LIC and GIC at similar rates.

With interest rates now headed towards single-digit figures, the power utilities had sought prepayments in a bid to reduce interest and finance costs.

But sources said here that PFC, REC and the FIs had conveyed that such prepayments were not admissible.

They added that encouragement of such prepayments would lead to severe asset-liability mismatches with the respective institutions themselves. This was because the institutions had raised the lending resources through long-term bond issues at rates as high as 13 per cent.

Consequently, prepayments would lead to very severe mismatches, and leave the lending institutions without any alternative lending programmes for the residual tenors. Besides, such prepayments were also likely to shrink the spreads of the lenders.

Further, the sources said, prepayments would also imply that the lenders would have to recall some of the bonds floated for raising the resources. Such call options, they said, would make it difficult for them to raise resources in future.

One alternative advanced to the States, therefore, is pricing the prepayments on the basis of the current yield to maturity (YTM) in the financial markets. Currently a five-year YTM is in the region of 6.5 per cent.

Consequently, for loans taken at 13.5 per cent, YTM-based pricing would imply a hefty premium of at least seven per cent, which would have to paid upfront.

YTM-based prepayment terms is intended to substantially mitigate the losses of the lending institutions, though this is expected to substantially raise the costs to the States.

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