is Reliance Power looking to reschedule debt?

Source :Promit Mukherjee & Rajiv Ranjan Singh | Place: Mumbai | 
: DNA :dec 6,2011 8 24 IST

With the commissioning date of its 4,000 mw Sasan ultra mega power project (UMPP) delayed by over 12 months, is Reliance Power looking to reschedule debt?

The company is in talks with IDBI Capital for the debt rescheduling, according to sources.

Reliance Power, however, denies any such plan saying it hasn’t drawn down on lines of credit to do so.

Sasan is the first UMPP bagged by Reliance Power and only the second to be awarded (after Mundra) in the country.

“Several independent power producers in the country are adopting the rescheduling route as their projects have been delayed due to problems not in their control,” said a top banker. Sasan UMPP is one such project, he said.

Rescheduling refers to a process under which a company approaches its bank to defer the payment of the principal amount on its loan by a few years as expected cash flows get delayed due to unforeseen delays, though it continues to pay interest during this period. The delay could be on account of difficulty in land acquisition, environmental and forest clearance or unexpected rise in raw material prices, which forces these companies to look for alternative sources.

“The power sector is going through a very tough time and we have had queries for debt rescheduling, which should not be confused with corporate debt restructuring,” he said, but added that in the next 12-15 months, several private power companies are expected to come up for restructuring as well.

This is different from corporate debt restructuring, which is a more complicated process of reorganising the outstanding liability of a company that is viable but is going through financial hardships and runs the risk of defaulting on impending repayments.

Under this process, the borrower and lender may mutually agree upon a course of action — typically, outside the purview of the Board for Industrial and Financial Reconstruction, Debt Recovery Tribunal and other legal proceedings — under which short-term debt may be converted into longer term debt and vice versa, or some a part of the debt may be converted into equity.

As per Reserve Bank of India guidelines, companies can go for restructuring only if their annual earnings before interest, tax, depreciation and amortisation, or Ebitda, is more than their annual debt.

The Sasan project is being built at a cost of `19,500 crore. Of this, nearly `11,000 crore ($2.2 billion) is debt syndicated by a few foreign banks, while the company is pumping in `5,000 crore as equity. The rest is domestic debt.

The project achieved financial closure in April 2009 with a consortium of banks and financial institutions led by the State Bank of India.

An email sent to Reliance Power remained unanswered at the time of going to press, while IDBI Bank refused to talk on the issue.

According to an analyst with a domestic brokerage, many newly operational power plants are operating at a plant load factor (PLF) of 60-65%, which coupled with a high fuel cost, doesn’t allow these plants to break even. Their tariff planning has gone haywire because of the volatile international coal prices and companies which were betting on imported coal, mainly from Indonesia, have suffered the worst.

“While bidding for power plants, companies place their quotes on two cost fronts —- fixed and variable. To grab projects, companies always quote low variable and high fixed cost to reduce the volatility of tariff, and any adverse change in the variable cost leaves companies with no room to manage costs,” said the analyst.

In power projects, fixed cost is a function of setting up of the infrastructure and variable cost is largely a function of the fuel the plant will consume, which in case of thermal power plants, is coal.

Recently, Tata’s upcoming UMPP at Mundra and Reliance’s second UMPP at Krishnapatnam saw the plant economies going haywire as the variable cost, which in this case was availability of coal from Indonesia, shot up due to the change in tariff regime implemented by the Indonesian government.

Starting September 22, Indonesia has benchmarked its coal prices to international prices, thereby escalating the cost of coal procurement to above $100 per tonne. This has made running the plants a loss-making proposition.