India Ratings & Research (Ind-Ra) says the inclusion of an external commercial borrowing (ECB) facility in the funding structure or substitution of the existing domestic debt with an ECB facility will not, automatically, improve the overall credit profile of the project.

While projects may be availing loans at interest rates lower than those charged in the domestic market, their debt service commitments in rupee terms may rise sharply if the rupee depreciates beyond initial expectations. The current depreciating trend of INR against USD is likely to erode the potential savings expected while availing the ECB facility.

Since some projects incur varying proportions of capital in foreign currency, the ECB acts as a natural hedging tool for payments to vendors in foreign currency over a fairly long construction period. However, debt servicing remains exposed unless hedged, which is rarely the case.

Based on its portfolio of rated projects, Ind-Ra estimates a savings of around 6%-15% of the total debt service obligations on account of ECB funding. These savings are, however, limited to the initial three to five years of debt amortisation. These envisaged savings are helpful since the ECB funding aids cash flows during the project’s initial ramp up stages. Notwithstanding these savings, the total outflow of an ECB-funded facility is likely to be higher than that of a facility funded solely in the domestic currency.

The benefits in the initial years of project stabilisation are expected to come at the expense of higher cash outflows, thanks to the unhedged exposure and heavily back-ended amortisation in the later years of the project life cycle.

A special report ‘Impact of Foreign Currency on Project Debt – Credit Neutral but Downside Risks Exist’ is available .

Source : Ghouse Mohd