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ISLAMABAD: Moody’s Investors Service has revised Pakistan Water and Power Development Authority (Wapda)’s outlook to negative from stable.

At the same time, Moody’s has affirmed the company’s B3 corporate family rating (CFR) and its b3 Baseline Credit Assessment (BCA).

The rating action follows Moody’s affirmation of the Government of Pakistan’s B3 ratings with an outlook revision to negative from stable on 2 June 2022.

“The rating action on Wapda reflects the close linkage of its credit quality with that of the Government of Pakistan, given the government’s full ownership and direct supervision, as well as, the fact that Wapda operates solely in Pakistan,” says Yong Kang, a Moody’s analyst.

Wapda’s B3 CFR is primarily driven by its b3 BCA and Moody’s assessment of a high likelihood of support from, and a very high level of dependence on, the Government of Pakistan (B3 negative) in times of need, under Moody’s Joint Default Analysis (JDA) for government-related issuers.

Wapda’s b3 BCA reflects its position in Pakistan’s power sector as a dominant hydropower supplier, as well as, the recurring financial support it receives from the government. At the same time, the BCA is constrained by the company’s weak financial profile due to its sizeable hydropower capacity expansion plan, the long receivables cycle and delayed tariff decision.

Moody’s expectation of a high likelihood of government support is based on the fact that the Pakistani government fully owns and directly supervises the company. It also reflects the company’s strategic importance to the government, as an important platform to (1) construct and operate hydropower assets to supply affordable electricity, and (2) build water storage facilities to help address the country’s acute water challenges.

However, such considerations are offset by the risks stemming from the government’s low policy predictability and transparency, which resulted in a change in Moody’s support assumption to high from very high, under its JDA approach.

Although there is no explicit uplift incorporated in the rating, the high likelihood of extraordinary support indicates some degree of the stability of Wapda’s credit quality, even if the company’s BCA were to be lowered, assuming no material change in the relationship between Wapda and the government.

Moody's downgrades Pakistan's outlook to negative from stable

The company’s delays in collecting revenue are mainly driven by the significant cash shortfall at the Central Power Purchasing Agency (CPPA), the state-owned agency that purchases power from generation companies on behalf of the nation’s distribution companies.

This shortfall mainly stems from (1) the gap between the low end-user electricity tariffs and high thermal power-generation costs, (2) high transmission losses, and (3) low recovery from end-users on electricity tariff payments, which increases CPPA’s leverage and constrains its repayment capabilities.

Moody’s projects Wapda’s funds from operations (FFO) to debt ratio will remain weak at around 2%-4% over the next one to two years, driven by (1) the company’s sizeable capital spending plans to expand its hydropower capacity and (2) the continued delay in collecting electricity revenue, which puts pressure on the company’s working capital. That said, such a ratio level is still within Moody’s expectation for Wapda’s b3 BCA.

In terms of environmental, social and governance (ESG) factors, Moody’s has considered that Wapda is exposed to environmental risks mainly because of physical climate risks in the form of extreme weather patterns, partly offset by a positive carbon transition exposure as a hydropower generator. The weak track record of timely tariff adjustments, driven by affordability concerns, is factored in the company’s rating as a social consideration.

Moody’s factors Wapda’s high financial leverage stemming from an aggressive capital spending plan, and concentrated ownership in the assessment of the company’s governance risk. The negative outlook on the rating mirrors the negative outlook on Pakistan’s sovereign ratings, given the close linkage of Wapda’s credit quality with that of the government.

Moody’s could change the outlook to stable or upgrade Wapda’s rating if the agency takes a positive rating action on the sovereign and there is no material change in the relationship between Wapda and the government. Moody’s could downgrade Wapda’s rating if Pakistan’s sovereign rating is downgraded or the company’s BCA weakens significantly.

The BCA could be lowered if Wapda’s profitability or financial position further weakens such that its FFO/ debt falls below 2% and FFO interest coverage remains below 1.2x on a sustained basis as a result of (1) changes in Pakistan’s regulatory environment, (2) aggressive debt-funded investments without timely tariff adjustments and/ or (3) further delays in the collection of electricity revenue.

However, a moderate weakening in Wapda’s BCA is unlikely to immediately lead to a downgrade of its rating, because of the high likelihood of extraordinary support from the Pakistan government.

Copyright Business Recorder, 2022

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samir sardana Jun 13, 2022 11:17pm
This is a technical downgrade - so that a SOE rating does NOT exceed the Soverign The WAPDA green bond on LSE last trade was on 1st June,2022 at 11:15:44 at 58 cents on the USD https://www.londonstockexchange.com/stock/67UB/pakistan-water-& -power-development-authority/company-page It is a thinly traded bond - with simple yield of 14 % (Not YTM).On that page,even Barclays has a simple Yield of 6% ! As per WAPDA Balance Sheet cost of Hydro loans (with FX hedge) is around 14-17%.So MINUS the FX loss on the interest coupon,on LSE Green Bonds when PAID, - it is not the EOD ! If you exclude the depreciation & interest on developing Hydro (charged off as interest in accounts) & salaries & pensions, the other cost is less than 12% of sales - & is a Fixed cost.Receivables to sales ratio is flat at 4-5 months (as WAPDA is giving working capital to the Grid & thus,the GOP at a cost of 12-17%). Habib has loaned to WAPDA at KIBOR + 400BPs. so 4-5 months lag is alright.dindooohindoo
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samir sardana Jun 13, 2022 11:27pm
If WAPDA was paid in time,interest cost would reduce,BUT THE RATING WOULD NOT PIERCE - the soverign,so a 4-5 months time lag is alright As far as YTM of LSE Bonds are concerned,it has no impact on WAPDA accounts or rating.The Green Bonds are due after 10 years. By that time,if PAKISTAN WANTS,SEVERAL GIGAATTS OF NUKE,SOLAR,WIND AND HYDRO WILL BE COMMISSIONED. In reality based on the thin trades of PAKISTAN WAPDA ON LSE - Overseas Pakistanis in GCC and IN LONDON,should buy the bonds, which have a YTM OF > 25%,as of today. SO THEIR SAVINGS,THEY CAN SEND TO PAKISTAN IN USD DEPOSITS AND THEN CAN LEVERAGE LOANS ON THEIR SALARY, TO BUY THE WAPDA BONDS TO GET A SIMPLE YIELD OF 14-15 % ! NO BANK IN PAKISTAN CAN GIVE A YIELD OF 15% IN USD ! LATER,WAPDA AFTER A FEW YEARS CAN EXERCISE OPTION TO PREPAY RETAIL. WAPDA PENSION IS THE HELIUM BALLOON.SO A CAPITAL,BUSINESS AND FINANCIAL RESTRUCT & DISINVESTMENT,HIVE OFFS INTO SPVs etc, is INEVITABLE - and so,Moody's rating is not EOD
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