Moody's Investors Service has affirmed the foreign currency long-term issuer ratings of Rural Electrification Corporation (REC) at Baa3.

The rating outlook is stable.

RATINGS RATIONALE

"REC's foreign currency issuer rating of Baa3 is in line with the Baa3 rating for the Government of India. Its rating is underpinned by its linkage with the government, given the latter's ownership, as well as the strategic role it plays in the government's plans for the power sector," says Vineet Gupta, a Moody's Vice President and Senior Analyst.

REC operates in a highly regulated industry, where the policies and the level of support provided by the government have positive implications for its cost of capital, financial strength of its borrowers, business growth and overall profitability. It is classified as a public-sector undertaking; the government owns 66.8% of the entity and has a representation on its board of directors.

REC is the key agency that provides financing for the Ministry of Power's Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) scheme, which aims to improve the access and quality of electricity supply in rural areas to ensure rapid economic development in these areas.

"Our expectation of the very high dependence and high probability of government support are based on the majority ownership by the government of India and its past record of supporting state-owned and state-sponsored financial institutions," Gupta adds.

Moody's has also repositioned the baseline credit assessment (BCA) of REC to 13 from 12, as it better reflects its standalone credit profile (on a scale of 1-21, where 1 represents the lowest level of risk).

In recalibrating the BCA, Moody's applied the overall analytical framework explained in its Finance Company Global Rating Methodology (March 2012). REC's standalone credit profile includes ordinary and ongoing support from the government, but does not include any form of external extraordinary support which it may receive.

However, any changes to its exclusive focus on financing the power sector could imply a reduced policy role, which could also adversely affect its foreign currency issuer rating.

In addition, the majority of its borrowings (more than 50% of gross tangible assets) are secured with receivables, providing less security for unsecured creditors. Any increase in the proportion of secured versus unsecured borrowings will weigh on the standalone credit profile and supported rating of Baa3. REC's asset and liability profile is weak as it relies on refinancing and interest recoveries for repayment of maturing debt since on-balance sheet liquid assets are very low. Any deterioration in the asset and liability mismatch could result in negative pressures on its standalone profile of 13 and the supported rating of Baa3. 

Moody's expects the company's financial metrics to remain stable, with capital adequacy ratio at 17.4% and net interest margin at 4.3% as on December 2011. Asset quality is likely to remain a positive factor, with its NPL ratio at less than 1%, though further deterioration in the financials of the state-electricity boards will also pressure the supported rating of Baa3.