Fitch Affirms Indian Railway Finance Corp at BBB Outlook Stable

Fitch Ratings-Hong Kong : Fitch Ratings has affirmed Indian Railway Finance Corporation Limited's (IRFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-'. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IRFC's ratings are credit-linked to the ratings of India (BBB-/Stable) due to IRFC's legal and funding ties with the Ministry of Railways (MoR). IRFC is classified as a credit-linked public sector entity under Fitch's criteria. The company's strategy is dictated by the government of India, which tightly monitors and controls it. IRFC plays an important strategic role in India's railway sector because it is the sole financing arm of the MoR.

The ratings derive strength from the MoR's ongoing support, as evidenced by regular equity injections into IRFC since its formation. IRFC's debt/equity ratio has been largely within the 10x limit during the past three years. Fitch expects further capital injections from the MoR if the ratio exceeds the limit. The MoR injected INR5.42bn and INR6.3bn into IRFC in the financial year ending March 2015 (FY15) and FY14, respectively.

IRFC is mainly involved in providing finance leasing to rolling stock such as locomotives, passenger coaches, and freight wagons. It provided around 25% of the MoR's total funding in FY15. Fitch expects IRFC to continue its collaboration with the government. Fitch expects IRFC's debt to increase by 15%-20% a year in the next two to three years due to the large capital expenditure budgeted by the government.

IRFC is wholly owned by the sovereign and its board of directors is appointed by the government. The MoR signs a memorandum of understanding with IRFC annually to set its operational and financial performance targets, which it reviews annually. The Comptroller and Auditor General of India appoints auditors to IRFC annually, enhancing government control.

Under the lease agreement between IRFC and the MoR, the ministry will cover any financial shortfalls by making advance payments for leases if IRFC does not have sufficient resources to redeem maturing bonds and/or repay loans. Fitch expects future standard lease agreements to continue to contain a similar assurance, and the MoR to provide funding to prevent liquidity mismatches that could lead to an IRFC default.

IRFC's profitability is resilient and highly visible because its interest income is charged on a cost mark-up basis, and the capital investment pipeline of the Indian railway sector is strong. Fitch expects the company's net profit to increase by around 10% a year in the next two years, mainly due to the rise of outstanding lease receivables. Its assets and liabilities are closely matched. Its solid reputation in capital markets means the IRFC can easily access domestic capital markets and banks for low-cost long-term funding.

RATING SENSITIVITIES

A positive rating action would stem from a similar change in the ratings of the sovereign in conjunction with continued strong support from the state.

Significant changes to IRFC's legal status that lead to a dilution of control by the sovereign or lower likelihood or less timely support by the sovereign may result in the ratings being notched down from the sovereign ratings.

The full list of rating actions follows:

IRFC

Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook Stable
Long-Term Local Currency IDR affirmed at 'BBB-'; Outlook Stable
JPY12bn 2.85% term loan due 2026 affirmed at 'BBB-'
JPY3bn 2.9% term loan due on 2026 affirmed at 'BBB-'
USD300m 3.417% senior unsecured notes due 2017 affirmed at 'BBB-'
USD500m 3.917% senior unsecured notes due 2019 affirmed at 'BBB-'