Fitch Ratings has affirmed India-based Power Finance Corporation Limited's (PFC) 'BBB-' Long-Term Foreign Currency Issuer Default Rating (FC IDR) at a Negative Outlook and its 'Fitch AAA(ind)' National Long-Term rating at a Stable Outlook. Fitch has also affirmed PFC's Foreign Currency senior unsecured rating and USD1bn senior unsecured medium term notes programme at 'BBB-'. PFC's National Short-Term rating has been affirmed at 'Fitch A1+(ind)'.

The ratings continue to reflect PFC's strong operational and strategic linkages with the government of India (GoI, 'BBB-'/Negative) and GoI's 73.7% ownership in the company. PFC is the central agency for implementation of GoI's Restructured-Accelerated Power Development and Reform Programme and Ultra Mega Power Projects. These programmes are aimed at reducing power transmission and distribution losses and increasing the generating capacity, respectively.

PFC's loan book grew at a CAGR of 24% over FY07 (year end March) to INR1,302bn in FY12. Fitch expects the loan book to continue growing due to expected capacity addition of 75-100GW during the Twelfth Five-Year Plan, with domestic banks reaching their sector exposure limits and steady growth in loan authorisations. Also, PFC has high recovery rates and low net non-performing assets (FY12: 0.93%, FY11: 0.20%) compared with the domestic banking system.

Defaults to PFC could lead to the loss of a low-cost and dedicated funding source for its borrowers, which, therefore, tend to prioritise payments to PFC over other lenders. Fitch believes the risk to the loan book to be low even though 63% of PFC's outstanding loan book was to state power utilities in FY12, as exposure to the loss-making distribution utilities is low at 4% of total loan assets.

Fitch considers PFC's cost of borrowings to have been moderate at 9% in FY12 (FY11: 8.53%). It received Infrastructure Finance Company status in July 2010, which provides it a lower risk weight on bank borrowing. It can also borrow up to USD1bn through external commercial borrowings annually. At end-FY12, PFC had a well-managed asset-liability profile, with average maturity of assets at 5.98 years and average maturity of liabilities at 5.95 years.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

• a downgrade of GoI's sovereign ratings
  
  

• a reduction in PFC's strategic importance to GoI
  
  

• a significant reduction in GoI's ownership in PFC leading to the loss of management control
  
  

• a reduction in support from GoI leading to deterioration in PFC's standalone credit profile

Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not

currently anticipate developments with a material likelihood, individually or collectively, of

leading to a rating upgrade. Future developments that may nonetheless potentially lead to a positive rating action include:

Revision in the Outlook on GoI's sovereign ratings to Stable could lead to a similar revision in outlook on PFC's FC IDR