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40-60% haircut may help resolve Rs 1 trillion of stressed power loans: Crisil

Credit ratings agency, Crisil Ratings in its latest report has said that a 40-60% haircut coupled with a few financial safeguards may help in resolving as much as Rs 1 trillion of debt stuck in coal-based power projects and enhance their viability on a sustained basis. It noted that the haircuts are also supported by financial safeguards such as elongated repayment structure, lower interest rate, comfortable liquidity through debt service reserve accounts (DSRA), and adequate working capital limits for coal requirements.

According to the report, for some capacities, takeover by a financially strong and more-experienced management can ensure quicker turnaround. It also pointed out that lower debt and the consequent reduction in the cost of electricity generation will make these capacities attractive to new power purchase agreements (PPAs). It also stated that thermal coal-based power capacities have been in stress for multiple reasons, including over-leverage due to costs over-runs, inadequate PPA and fuel supply agreements, and aggressive bids.

While structural issues such as PPAs and fuel supply agreements may continue, the ratings feels debt haircuts can potentially improve cost of generation for these plants. It also said that lower cost of generation will also enhance the competitiveness of these capacities, making them amenable to new PPAs, provided fuel supply remains adequate. It added that with power demand expected to grow at a healthy pace of around 6 percent over the next four years (5.5 percent in financial year 2018), these capacities could benefit from potential new PPAs.

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