In a significant step that can change the power scenario in the country and signal the success of the Ujwal Discoms Assurance Yojana (UDAY) in Uttar Pradesh, India Ratings and Research (Ind-Ra) has assigned UP Power Corporation (UPPCL)’s proposed R10,000-crore bond a provisional ‘IND AA(SO)’ rating with a stable outlook. This makes it India’s first state government revenue-supported bond. Another first for this transaction is the Reserve Bank of India-backed structured debt servicing mechanism. Under this mechanism, in case the specially created bond servicing account falls short of the amount required to service the debt, and later if the state government is unable to fund it by a specified date, the RBI will debit the requisite amount from the state government’s account with the central bank and credit it to the UPPCL bond servicing account one day prior to the due date of bond servicing. Ind-Ra believes this structure will provide confidence to investors and timely servicing of the debt.
“What makes this particular bond issue different from the bonds issued in the past is that in this case the entire state revenue is available for bond servicing,” the agency said.
Immediately after the ratings, UPPCL floated the first tranche of bonds and has already raised R6,500 crore from as many as 8 investors at an interest of 8.97% for 10 years, including a moratorium of 3 years. The second tranche of bonds, expected to raise R3500 crore, would be issued soon.
This is the second time the UPPCL is raising money through bonds to fund its operational funding requirements under the provisions of the UDAY agreement, which aims to restructure financials of all the beleaguered power distribution companies in the country by enabling state governments to bail out their utilities and compel them to improve efficiency and cut power theft.
A senior official of the energy department told FE that UPPCL arrived at this most unique structure in consultation with the RBI after all other efforts to issue bonds failed. “In order to fund this year’s operations funding requirements under UDAY, we needed to raise R10,000 crore and had issued bonds in June last year. But owing to the RBI missive to banks to exercise caution while giving fresh loans to discoms, and that those loans would be counted as NPAs, no bank participated in it, forcing us to abandon the issue in December last year. Due to the delay, our liabilities were rising and we were unable to meet our operational requirements,” the oficial said.
“Our merchant bankers told us that we cannot issue any bond without rating and because of our losses, rating was not possible. Even bonds backed with state government guarantees were not being given weightage as there were instances of them not being honoured by some state governments, leading to a dip in investor confidence,” the official said.