Fitch Ratings has assigned Indian Railway Finance Corporation’s (IRFC) proposed US dollar notes an expected rating of ‘BBB-(EXP)’. The rating is aligned with IRFC’s Long-Term Issuer Default Rating (IDR) of ‘BBB-‘, which has a Stable Outlook.
The final rating on the notes issue is contingent upon the receipt of final documents conforming to information already received.
Fitch Group is a global leader in financial information services with operations in more than 30 countries. In addition to Fitch Ratings, the group includes Fitch Solutions, an industry-leading provider of credit risk products and services, and Fitch Learning, a preeminent training and professional development firm. Fitch Group is jointly owned by Paris-based Fimalac, S.A. and New York-based Hearst Corporation.
KEY RATING DRIVERS
IRFC’s ratings reflect the entity’s public sector status, government ownership and strong operational and strategic ties with the government of India, resulting in a strong likelihood of extraordinary government support if needed.
As such, IRFC has been classified as a dependent public sector entity under Fitch’s criteria and the ratings are credit linked to that of the sovereign.
The ratings derive strength from the Ministry of Railways’ ongoing support as evidenced by regular equity injections into IRFC since its formation. IRFC’s debt/equity ratio has been close to the regulatory 10x limit in the past three years. Fitch expects further capital injections from the Ministry of Railways if this ratio were to exceed the limit. The ministry injected INR7.5bn and INR6bn in FY12 and FY13, respectively.
IRFC is the sole financing arm of the Ministry of Railways and is mainly involved in providing finance leases to rolling stocks including locomotives, passenger coaches, and freight wagons among others. Fitch expects IRFC’s collaboration with the government to persist.
IRFC is wholly owned by the government and the board of directors is appointed by the government. The Ministry of Railways signs a memorandum of understanding with IRFC every year to set its operational and financial performance targets, which it reviews on a quarterly basis. The Comptroller and Auditor General of India appoint IRFC’s auditors on an annual basis, enhancing government control.
It has been agreed with IRFC that the Ministry of Railways will cover any shortfall, by making advance payments of lease rentals, if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects future standard lease agreements to continue to contain a similar assurance and the ministry to provide funding to prevent liquidity mismatches that may lead to an IRFC default.
IRFC’s profitability is resilient and highly visible because its interest income is charged on a cost mark-up basis and the capital investment pipeline of the Indian railway sector is strong. Its assets and liabilities are closely matched. With a sound reputation in capital market, Fitch expects IRFC to be able to easily access domestic capital markets and banks for low-cost long-term funding.
A positive rating action would stem from a similar change in the ratings of the Indian sovereign in conjunction with continued strong support from the government.
Significant changes to its strategic importance and financing arm status to the Ministry of Railways or a dilution in the government’s shareholding to less than 51% could result in the entity no longer being classified as a dependent public sector entity and therefore no longer being credit- linked to the sovereign rating.
IRFC was incorporated to raise funds from debt capital markets to finance the acquisition of new rolling stock to meet the developmental needs of the Indian railway system administered by the Ministry of Railways. Established in 1986, IRFC is registered as a notified public financial institution under the Companies Act, 1956 and as a non-banking finance company and asset finance company under the Reserve Bank of India (RBI) Act, 1934.
Contact: Primary Analyst Terry Gao Associate Director +852 2263 9972 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Fernando Mayorga Managing Director +34 93 323 8407 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: firstname.lastname@example.org; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: email@example.com. Additional information is available at www.fitchratings.com.”
Moody’s Investors Service assigns ‘BBB-‘ rating to IRFC
Likewise, Moody’s Investors Service has assigned a Baa3 rating to the proposed USD benchmark senior unsecured notes to be issued by Indian Railway Finance Corporation (IRFC, Baa3). The rating outlook is stable.
The proposed notes are expected to have a 5-year maturity and will be listed on the Singapore Stock Exchange.
The net proceeds of the issue will be used to finance the purchases of rolling stock such as locomotives and wagons, which will be leased to India’s Ministry of Railways.
The Baa3 rating is derived from IRFC’s Baa3 long-term foreign currency issuer rating, as the notes will constitute the senior unsecured obligations of IRFC and will rank pari passu among themselves and equally with the company’s other senior debt.
Consequently, the notes are rated at the same level as IRFC’s foreign currency issuer rating, which in turn shares the same rating as the Government of India’s (Baa3, stable) foreign currency bond rating.
The rating outlook for the proposed notes is in line with the rating outlook on India’s sovereign debt.
IRFC’s rating is derived primarily from the company’s close linkage to the government, as it is the exclusive borrowing arm of the Ministry of Railway. IRFC raises funds for capital investment in India’s railway infrastructure, which it then leases to the ministry.
The company operates under the administrative control of MOR, and although it legally owns nearly 60% of the rolling stock fleet used on India’s government-owned railways system, the ministry retains the purchasing authority for such assets, as well as the responsibility for the operation and maintenance of the rolling stock. The ministry’s responsibility includes complete liability for accidents, injuries, and other related issues.
We have determined that the IRFC’s credit profile is inseparable from the government’s own credit profile, given the control exercised by MOR over both IRFC and its assets. Government policies and the level of support provided by the ministry are, therefore, the main factors determining IRFC’s funding costs, the growth in its profitability and, ultimately, its overall credit quality.
The rating also reflects the company’s strong capitalization, consistent track record of profitability, impeccable asset quality, and the challenges emanating from its dependence on wholesale funding.
S&P assigns ‘BBB-‘ rating to IRFC
Standard & Poor’s Ratings Services today assigned its ‘BBB-‘ foreign currency issue rating to a proposed issue of U.S.-dollar-denominated senior unsecured notes by Indian Railway Finance Corp. The rating on the notes reflects the long-term counterparty credit rating on IRFC and is subject to our review of the final issuance documentation.
In line with its main policy mandate, IRFC intends to use the notes proceeds to acquire rolling stock, which the company will lease to the ministry of railways. The proposed notes will constitute direct, unconditional, unsecured, and unsubordinated obligations of IRFC. They shall at all times rank at par among themselves and with all other unsecured and unsubordinated obligations of the company.
The long-term issuer credit rating on IRFC is equalized with the sovereign credit rating on India to reflect Standard & Poor’s opinion of an ”almost certain” likelihood of timely and sufficient extraordinary government support to IRFC in the event of financial distress. In accordance with our criteria for government-related entities, our rating approach is based on our view of IRFC’s ”critical” role as the financing arm of the state-owned Indian Railways and ”integral” link with its sole owner, the government of India.
The rating on IRFC incorporates strong direct government support in the form of capital injections, permission to issue tax-free bonds, and arrangements to fund debt-payment shortfalls or emergencies.