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C. Shivkumar

BANGALORE, July 9

POWER Finance Corporation (PFC) has ruled out any changes in its lending covenants and has conveyed that all its funding would be done only on the basis of bankable financial security packages which include escrow cover.

Sources said that there was resistance from some of the States including Karnataka to any of these security packages. However PFC, they said, was not willing to make any concessions as far as escrow support was concerned. Escrow cover would remain as one of the covenants instituted by PFC way back in the last decade as part of the operational and financial adjustment plans for State power utilities.

This, they said, would remain irrespective of the track record in repayments of some of the utilities. Utilities in Karnataka have so far maintained a reasonably good record in paying their debt dues to the Central power financing agencies.

In this background they are seeking a relaxation in view of the tight financial security packages. The sources also reiterated that PFC would continue to have the first charge on all the escrow account provided by the borrowers till such time as the entire debt is repaid. As a result, other lending agencies including financial institutions are expected to be given only a secondary charge on the escrow.

Alternatively an entirely new escrow account would have to be created for these lending institutions carved out of a separate revenue stream.

PFC is meeting partly the debt-financing requirements of the 290 MW Alamatti power project undertaken by the State owned utility, Karnataka Power Corporation (KPCL). The debt-financing component of this project is estimated to be in the region of Rs 572 crore.

Even for this project, the sources said, an escrow cover would have to be put in place to make it fully bankable. PFC's funding would enable KPCL to avail of four per cent interest subsidy. Although a three-tier unbundling has taken place in the State, the bulk power buyer would have to provide the financial security package as a pre-condition for project-financing.

The sources said that such lending principles were being put in place since borrowers, including KPCL, would still not be in a position to meet the debt service coverage ratio (DSCR) norms.

This ratio measures the debt carrying capacity of the borrowing entities. The minimum DSCR prescribed for project financing is 1.5, whereas power utilities are way below this lending criterion, they said.

PFC's rigid stand leaves the Karnataka Government with few alternatives for meeting project-financing.

An alternative that had been proposed by the Infrastructure Development and Finance Company (IDFC) for funding Unit 7 of the RTPS was the creation of a reserve fund out of divestments from distribution companies as a comfort for lenders.

Since this fund has still not been created, the 210 MW Unit 7 has still not reached financial closure. Consequently funding for this project is being done entirely through short-term borrowings, including bridge loans.

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