IRFC to retain business model

S&P Global Ratings affirmed its ‘BBB-‘ long-term issuer credit rating on Indian Railway Finance Corp (IRFC), saying the stable outlook on IRFC mirrors the outlook on the India sovereign credit rating (BBB-/Stable/A-3).

It reflects S&P assessment of an almost certain likelihood of extraordinary government support for IRFC in the event of financial distress.

“We believe IRFC will continue to play a critical role in the Indian government’s economic development plans and policies, notwithstanding the government’s plan to sell a minority stake in the company,” said S&P on 26 Sept 2019.

“Even with the sale, we expect IRFC to retain its current business model, its status as a public-sector entity, and support from the sovereign.

“We could lower the rating on IRFC if the proposed part-privatization results in a change in the company’s business model, which would materially affect its creditworthiness through a diminished role or link with the Indian government. Additionally, we could downgrade IRFC if we lower the ratings on India,” said the rating agency.

S&P could upgrade IRFC if it raised the rating on the sovereign and if the company maintains its role and link with the government.

The rating affirmation reflects S&P expectation that the likelihood of support to IRFC from the India government is almost certain, given the company’s critical role and integral link.

IRFC executes strategic governmental policies and is a nonseverable arm of the India government.

The rating on IRFC is supported by the entity’s position that makes it solely responsible for raising funds to purchase rolling stock such as passenger coaches and freight wagons for the Ministry of Railways (MoR).

Railways are crucial in powering India’s economic development, especially because they help navigate the country’s large size and challenging geographical terrain.

The rating reflects governmental support the entity receives in several forms–including guarantees, budgetary support, and lease agreements that help timely debt payment.

IRFC was set up in 1986 as the sole agency for funding MoR’s extra budgetary requirement, the other source being government budgetary funds.

It has provided a quarter of the overall planned funding required by Indian Railways so far. The cumulative acquisition until March 31, 2018, funded by IRFC amounted to 70% of MoR’s rolling stock. Of the Rs.940 billion capital outlay for railways in 2019-2020, approximately Rs.554 billion (~60%) is allocated for budgetary support from IRFC.

IRFC also helps in raising funds for other government-related railway entities and thus, can be viewed as MoR’s main funding arm. It has also been entrusted with the crucial task of securing institutional finance for railway projects. fiinews.com