Moody’s Investor Service Assigns Corporate Family Rating ‘B3’ to WAPDA

Moody’s Investors Service, the New York-based bond credit rating company, has assigned a first-time corporate family rating (CFR) of B3 to Pakistan Water and Power Development Authority (WAPDA). The rating outlook is stable.

WAPDA’s B3 CFR is primarily driven by its baseline credit assessment (BCA) of b3, and Moody’s expectation of a very high likelihood of support, and a very high level of dependence on the Government of Pakistan (B3 stable) in times of need, under Moody’s joint-default analysis approach for government-related issuers, the report said.

“WAPDA’s b3 BCA reflects its dominant position in supplying hydropower services and developing water infrastructure in Pakistan, as well as the recurring financial support it receives from the Pakistani government,” says Boris Kan, a Vice President and Senior Credit Officer at Moody’s.

“At the same time, the BCA is constrained by the company’s weak financial profile due to its sizable hydropower capacity expansion spending, and the delays in collecting hydropower generation tariffs,” he said. Moody’s expectation of a very high likelihood of government support is based on the fact that the Pakistani government fully owns and directly supervises the company.

The report said that the current financial situation of the company and the government’s expected role in its future is also indicative of the company’s strategic importance to the government on several levels. Firstly, as its sole platform to construct and operate hydropower assets to supply affordable electricity, and secondly to build water storage facilities to help address the country’s acute water challenges.

Although there is no explicit uplift incorporated in the rating, the very high likelihood of extraordinary support indicates the resilience of WAPDA’s B3 rating, even if the company’s BCA is lowered, assuming no material change in the underlying creditworthiness of WAPDA, Moody’s report said.

Moody’s also noted that the company’s delays in collecting hydropower tariffs is mainly driven by the significant cash shortfall in the Central Power Purchasing Agency (CPPA), which is the state-owned agency that purchases power from the company on behalf of the nation’s distribution companies. This shortfall mainly stems from the gap between the low end-user electricity tariffs and high-power generation costs, high transmission losses, and low recovery from end-users on electricity tariff payments, which increases CPPA’s leverage and constrains its repayment capabilities.

As a result, Moody’s expects WAPDA’s financial metrics to remain weak over the next one to two years, driven by the company’s sizable capital spending plans to expand its hydropower capacity, and the delays in collecting hydropower tariffs, which puts pressure on the company’s working capital.

The stable outlook primarily reflects the current stable outlook on Pakistan’s sovereign rating, Moody’s expectation that the company’s BCA will remain appropriately positioned at b3, and its strategic importance will not be materially affected by regulatory changes.

Moody’s could upgrade WAPDA’s rating if the Pakistani government’s ability to provide support strengthens, which would be illustrated by an upgrade of the sovereign rating. On the other hand, Moody’s could downgrade WAPDA’s rating if the Pakistani government’s ability to provide support weakens, which would be illustrated by, but not limited to, a downgrade of the sovereign rating, or a demand for repayment by WAPDA on loan principal or interest owed to the Pakistani government.

WAPDA’s governance risk is moderate. While WAPDA is wholly owned and under the administrative control of the Pakistani government, the company’s financial policy is characterized by high capital spending and leverage. The absence of independently audited financial statements for the company’s water segment is another important consideration. However, such risk is currently manageable at the current rating level.

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

SBP Introduces a Mechanism for Remitting Disinvestment Proceeds

Xiaomi’s New Water Purifier Can Filter 2.5L of Water Per Minute