Strategic buyouts under IBC to drive resolution of ~5 GW stressed capacity
For asset reconstruction companies (ARCs), the cumulative recovery rate1 for stressed operational thermal power plants (TPPs) is set to improve 700-900 basis points (bps) on-year to 83-85% next fiscal, driven by robust growth in power consumption on the back of adequate coal availability, timely payment by distribution companies (discoms) and expected healthy merchant power prices.
These industry tailwinds are not only supporting faster resolutions but may also aid resolution of ~5 GW of stressed TPPs over next 2 fiscals.
An analysis of the security receipts (SRs) rated by CRISIL Ratings Ltd for stressed operational TPPs with principal debt of ~Rs 18,000 crore across ~4 GW (~50% of operational TPP capacity with ARCs), indicates as much.
Power consumption is expected to rise 6-7% this fiscal, driven by a surge in demand from the commercial and industrial (C&I) segments, and growing urbanisation.
In this milieu, thermal power generation companies (gencos) are likely to capitalise on the opportunity by improving their plant load factor (PLF).
Government initiatives had improved coal availability for TPPs by 8.8%2 last fiscal, leading to healthy inventories with the TPPs. This trend is expected to sustain3 with a ramp-up in coal production and improved evacuation infrastructure4.
More availability along with healthy offtake by discoms and rising merchant sales are improving the average PLF for the SR pool of stressed TPPs rated by CRISIL Ratings to a healthy ~70% this fiscal compared with 66% in fiscal 2023. This is driving improvement in ARC recoveries through faster debt aggregation and quicker restructuring or refinancing.
Says Mohit Makhija, Senior Director, CRISIL Ratings, "The trend is likely to continue. Operating performance and cash flows of stressed operational TPPs will strengthen this fiscal. Additionally, timely realisations from discoms will also improve the liquidity position. The receivables position of thermal plants rated by us has already improved to 185 days as on March 31, 2024, from 200 days a year earlier."
With improving operating performance, the debt to Ebitda (earnings before interest tax depreciation and amortisation) ratio of stressed capacities in the CRISIL Ratings SR portfolio is expected to improve to less than 6 times this fiscal from 10 times in fiscal 2023. This has not only spurred better recovery rates for the TPPs (see chart 1 in annexure) but is also paving way for enhanced investors' interest for stressed TPPs.
As much as 5 GW of thermal capacity with more than Rs 50,000 crore debt from secured creditors awaits resolution under the Insolvency and Bankruptcy Code. These capacities experienced stress during 2018-2019 owing to a multitude of factors such as over-leverage, implementation delays and lack of power purchase agreements (PPAs).
Despite the stress factors, these capacities offer opportunities for acquisition with potential upside as ~55% of the 5 GW capacity can be operationalized with fresh capital investment, while ~45% already are with PPAs tied up. Plus, there is scope for addition of ~3 GW to the existing capacity where requisite approvals and groundwork necessary to scale up are already in place.
Says Sushant Sarode, Director, CRISIL Ratings, "Investors looking for the resolution of stressed TPPs will benefit as power supply addition will be faster compared with setting up greenfield projects over the medium term. Hence, large companies in this sector may look to invest in these assets, as also seen in strategic buyouts of 11 GW stressed capacities in past three fiscals. The key for quicker resolution will however, lies in sizing down the stressed debt to the right sustainable levels acceptable to both lenders and investors." |
