Tata Power Company Perpetual debentures June 2011

CRISIL has assigned its 'AA/Positive' rating to The Tata Power Company Limited's (Tata Power's) issue of Rs.15 billion unsecured, listed, subordinated, perpetual debentures. Perpetual debentures, a kind of hybrid instrument, combine features of both debt and equity – CRISIL has accorded 50 per cent equity content to this instrument. It implies that CRISIL, in its analysis of Tata Power's capital structure and financial ratios, will treat 50 per cent of the principal amount as equity and the other half as debt. CRISIL has also reaffirmed its ratings on the company's existing debt instruments and bank facilities at 'AA/Positive/P1+'.

Says Mr. Pawan Agrawal, Director, CRISIL Ratings, "The rating of this instrument is based on an expectation that the embedded flexibility to defer distribution payments is unlikely to be used by the issuer." This expectation is based on an analysis of the key features of the instrument, as well as CRISIL's understanding of the management's intent. Therefore, this perpetual instrument is rated at the same level as other traditional long-term bonds issued by Tata Power. "The 50 per cent equity-content treatment to this instrument emanates from the presence of a strong replacement capital covenant and the instrument's deeply subordinated position in issuer's capital structure", adds Mr. Agrawal.

Such perpetual hybrid instruments provide several benefits to issuers. They allow a better balancing of capital structure, enhance financial flexibility, expand the choice of instruments that can be issued to access debt markets, and enable diversification in the investor base. For investors, such instruments offer a relatively higher return to compensate for the highly complex nature, a subordinated position, and a potential uncertainty over timing of maturity and risk of distribution deferral.

Considering the emerging interest in such newer instruments by Indian debt market participants, CRISIL has released its detailed criteria for rating of perpetual securities issued by corporate sector entities. Says Mr. Arun Panicker, Chief Analytical Officer, CRISIL Ratings, "CRISIL has become the first Indian rating agency to publish its comprehensive analytical framework for rating such securities in the public domain. This highlights CRISIL's commitment towards enabling innovation in Indian market, enhancing transparency in the market place by providing participants with an opinion on risks in newer domains, building investor confidence in our risk assessment capabilities, and facilitating development of Indian debt markets." The detailed criteria document is available at our website www.crisil.com.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.