Fitch Ratings today assigned a Long-term foreign and local currency Issuer Default rating (“IDR”) of ‘BBB-’ (BBB minus) to Rural Electrification Corporation Limited (“REC”). The agency also affirmed the National long-term Issuer rating at ‘AAA(ind)’, its senior unsecured debts at ‘AAA(ind)’ and its commercial paper at ‘F1+(ind)’. The Outlook on the ratings is Stable.

The ratings on REC are based on Fitch’s assessment of the strategic importance of the company to the Government of India (“GoI”) and on the support that is available to the organisation. REC is the nodal agency for funding rural electrification and a failure of the organisation could impair the availability of funds for electrification of villages, a socially and politically important objective for the GoI. Furthermore, REC is one of the two GoI-owned finance companies operating exclusively to provide funds for the development of power industry in India and is an important source of funds for state-owned power utilities (“SPU”).

REC is supported by the GoI in multiple ways. Grants and interest subsidies channelled through REC reduces the overall cost of projects funded through loans from REC. REC is supported in its debt mobilisation by the tax concessions which are available on the bonds issued by REC and GoI guarantees. The agency also notes that, historically, the support has ranged from regular equity injections and active support for recovery of dues from financially weak SPUs. The availability of tax concessions reduce the average cost of borrowing for REC, which, coupled with the flexibility available to REC to invest almost its entire asset book in loans instead of, like banks, having to invest in statutory assets, provide it with margins comparable with the best Indian banks.

REC is expected to raise equity capital in fiscal year ending 31 March 2008 (“FY08”) through its first public equity offering. While this will result in GoI’s stake lowering to around 80%, Fitch does not anticipate that this would change the development role being played by the organisation, its focus on a single industry or its relationship with the GoI, over the next three to five years.

The ratings are also supported by REC’s strong business prospects and its high present profitability and capital adequacy ratios, which are comparable to the medians of its rating category. The company reported return on equity of 16.0% and net interest margins of 2.9% in FY06. Capitalisation levels are comfortable with equity to loans of 16.5% and net NPLs to equity of 6.7%. While reported capital adequacy ratios for REC are high, its key risk emanates from its exposure to a single industry with relatively weak borrower credit worthiness. At end-FY06, the company had total assets of INR299.3 billion (equivalent to USD6.7bn) and net income of INR6.4bn (USD142.9 million).

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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