Fitch Ratings has assigned Indian Railway Finance Corporation’s (IRFC) USD500m 3.917% senior unsecured notes due 2019 a final rating of ‘BBB-‘. The rating is aligned with IRFC’s Long-Term Issuer Default Rating (IDR) of ‘BBB-‘, which has a stable outlook.
The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is in line with the expected rating assigned on 13 January 2014.
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 largely inside the 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.
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.
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.