With total outstanding regulatory assets of thermal power sector across the country reaching Rs 76,963 crore, the proposed bond issuance programme through the securitisation of such receivables will be beneficial to both investors and borrowers, according to India Ratings.
According to the quantum of existing regulatory assets analysed by the rating agency as per the latest tariff orders till FY2017-18-FY2018-19, the top three states including Uttar Pradesh, Maharashtra and Jharkhand, account for around 87 per cent of the current regulatory assets market worth Rs 76,963 crore.
"The regulatory assets' securitisation market in India is evolving, and the issuance of bonds secured by regulatory assets is still in the nascent stage. However, we believe both borrowers and investors would benefit from such transaction," its Senior Analyst Arijeet Maji said.
Regulatory assets include receivables from consumers allowed by regulatory authorities.
Of the total regulatory assets, nearly 97 per cent have to be collected by state distribution companies, leaving only around three per cent for future collections by private companies.
The agency however pointed out that the key risks pertaining to the transaction structure involves credit risk of the discom that will act as the primary agent for collecting the regulatory assets from residential/ industrial customers.
It further said that absence of legal separation of assigned regulatory assets securing the bonds issued from other balance sheet assets, will lead to security enforcement issues in the event of the dicom's bankruptcy
"Also, there is lack of clarity in the tariff order pertaining to the quantum of regulatory assets approved, the holding costs pertaining to delayed realisation, the period of amortisation of the regulatory assets, and the tariff allocated to the regulatory asset as a proportion of the total tariff billed to end-users of electricity," Maji said.
He further said that there is also a cash-flow mismatch risk due to significant variations in the repayment profile of the bonds issued and the amortisation schedule of tariff order approved regulatory assets.
"We believe the incorporation of certain additional structural features in such transactions, features that are widely used in developed economies such as the United States, shall support the development of a mature market for Indian regulatory assets," Maji added.