Crisil estimates inter-state transmission system (ISTS) projects present a Rs 30,000 crore refinancing opportunity for the bond market over the next 3 years as 14,000 circuit km of under-construction lines come on stream.

The credit risk profile of operational ISTS projects is strong because of assured cash flows, low operations and maintenance (O&M), and low counterparty risk. This appeals to bond investors, as is evident from bond issuances of Rs 5,000 crore for operational ISTS projects over the past couple of years.

Says Sachin Gupta, Senior Director, Crisil Ratings: “Such refinancing will help lower cost by around 100 basis points. Also, the tenure of funding will get extended to 15 years or more, which would improve the financial flexibility of projects. It will also free up capital for banks that can be used for lending to other sectors.”

Revenue for ISTS projects is assured through long-term (30-35 years) transmission service agreements, and is delinked from the quantum of electricity transmitted.

To be sure, revenue is contingent on maintaining line availability above 98%. But this is easily achievable through routine O&M, and is not technically challenging.

An analysis of operational ISTS assets of companies rated by Crisil shows consistent availability of over 99%. That’s unlike private thermal generation assets, where revenue remains exposed to higher risks of fuel supply, plant availability and, most importantly, counter-party risk of financially challenged state distribution companies (discoms).

Counterparty risk is quite low for ISTS projects because of the presence of a point of connection, or PoC, mechanism, managed by Power Grid Corporation of India Ltd (PGCIL).

Under this, all ISTS projects have shown timely collection of more than 97% payments from respective discoms. Crisil expects this collection track record to sustain over the medium term given the strong and active role of PGCIL.

Says Nitesh Jain, Director, Crisil Ratings, “Given the milieu, Crisil expects the credit profiles of ISTS projects, once operational, to remain healthy, and present a fairly large, low-risk investment opportunity to bond investors.”