Fitch Ratings has revised the Outlook on Indian Railway Finance Corporation Limited’s (IRFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed its IDRs at ‘BBB-‘. A list of additional rating actions is provided below.
KEY RATING DRIVERS
The rating action follows Fitch’s revision of the Outlook on India’s Foreign- and Local-Currency IDRs to Stable from Negative (see rating action commentary “Fitch Revises India’s Outlook to Stable; Affirms Ratings at ‘BBB-‘ ” dated 12 June 2013 at www.fitchratings.com).
IRFC’s ratings reflect the entity’s public sector status, government ownership, and strong operational and strategic ties with the government of India (GoI), 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 Ministry of Railway’s (MoR) 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 MoR if this ratio were to exceed the limit; INR7.5bn and INR6bn were injected by the MoR in FY12 and FY13 respectively.
IRFC is the sole financing arm of the MoR and is mainly involved in providing finance lease to rolling stocks including locomotives, passenger coaches, and freight wagons among others. At end-March 2012, IRFC financed around 25% of the total outlay of the MoR. Fitch expects IRFC’s collaboration with the government to persist over time.
IRFC is wholly owned by the government and the board of directors are appointed by the government of India (GoI). The MoR 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 appoints auditors of IRFC on an annual basis, enhancing government control.
It has been agreed with IRFC that the MoR will cover any shortfall of IRFC 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 MoR to provide funding to prevent liquidity mismatch that may lead to a IRFC default.
IRFC’s profitability is resilient and highly visible since 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 deems IRFC can 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 sovereign in conjunction with continued strong support from the GoI.
Material changes to its strategic importance and financing arm status to the MoR or a dilution in the government 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.