PremiumCorporate infrastructure issuers are generally better positioned to manage their exposure when compared to project finance issuers, who rely on common financial hedges that do not completely eliminate currency risk, Moody’s said
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New Delhi: India’s rated infrastructure issuers can largely withstand further depreciation of the domestic currency because of financial hedges and other mitigants, Moody’s Investors Service said in a report on Thursday.
However, a small number of issuers are vulnerable if the US dollar depreciates to the mid-to-high 80 range, because of their reliance on imperfect financial hedges, the release showed.
“Corporate infrastructure issuers are generally better positioned to manage their exposure when compared to project finance issuers, who rely on common financial hedges that do not completely eliminate currency risk," said Spencer Ng, a Moody’s Vice President and Senior Credit Officer.
“Generally, corporate infrastructure issuers have features that shield them to currency weakness, including their: (1) ability to recover some of the additional costs from their regulated tariffs, such as NTPC Limited (Baa3 stable); (2) access to USD revenue, such as Adani Ports and Special Economic Zone Limited (Baa3 stable); and (3) less concentrated exposure to USD debt as part of their overall debt structure," the agency said in the release.
In contrast, project finance issuers typically rely on imperfect financial hedges because of very high hedging costs in India and the limited availability of long tenor products.
Depending on their hedging strategy, project finance issuers will face different residual exposure as the currency fluctuates over time. Although hedging strategies have so far been effective, a sustained INR drop could put some issuers under pressure.
“Nevertheless, issuers have additional arrangements to reduce credit exposure. These include dedicated reserves to help support the rollover of shorter dated hedges or sponsor support mechanisms provided to project finance transactions," Moody’s said.
“Although these additional arrangements provide another layer of protection to bondholders, their effectiveness will be constrained by factors such as the project sponsor’s capacity to support," the rating agency added.