Fitch Ratings has affirmed Indian Railway Finance Corporation Limited's (IRFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB-'.

The Outlook is Stable, in line with that of the Indian sovereign (BBB-/Stable). Fitch has also affirmed IRFC's USD7 billion global medium-term note programme and outstanding senior unsecured note rating at 'BBB-'.

The affirmation reflects Fitch's view that IRFC remains an important Indian government-related entity (GRE). We have taken into consideration the company's strategic role in supporting India's railway sector and a robust framework for state support. Hence, Fitch believes that the government has a very strong incentive to provide extraordinary support to IRFC, if needed. The state-owned IRFC is a non-banking financial company that acts as the dedicated lending arm of the Ministry of Railways (MoR).

KEY RATING DRIVERS

Support Score Assessment 'Virtually certain'

We believe that extraordinary support from the government of India to IRFC would be virtually certain in case of need, reflecting a support score of 50 (out of a maximum 60) under our Government-Related Entities Rating Criteria. This reflects a combination of responsibility to support and incentive to support factors.

Responsibility to Support

Decision Making and Oversight 'Very Strong'

The government owned 86.36% of IRFC as of the financial year end-March 2024 (FY24). The government controls the IRFC's board, which includes two government nominees. Operation terms are set out in the IRFC's annual standard lease agreement with the MoR. In addition, the MoR signs an annual memorandum of understanding (MoU) with IRFC that governs the company's borrowing targets and level of financing.

Precedents of Support 'Very Strong'

The government's supportive framework is included in the standard lease agreement. IRFC services its debt mainly via lease payments from the MoR. IRFC's leases to the MoR are based on a weighted-average cost plus a margin of 40bp for rolling stock assets and 35bp for project assets. The weighted-average cost also covers foreign-currency hedging costs and losses, as well as hedging costs for interest rate fluctuations.

The government grants IRFC tax benefits and eases its financing burden by allowing it to issue 54EC bonds, which carries lower finance costs due to a tax benefit for investors. In addition, there is potential liability transfer in case of IRFC's financial distress. In the event that IRFC is unable to redeem its bonds and/or repay its loans, the MoR is required to make good such shortfalls.

Incentives to Support

Preservation of Government Policy Role 'Strong'

Fitch's assessment reflects IRFC's designation as an important policy role in financing the Indian Railways (IR), which is the national operator of railway system and a statutory body under the MoR. IRFC's contribution to IR's capital outlay has varied with budget allocation, from 67% in FY21 to an estimated zero in FY24. Even so, Fitch believes that the company's importance as a financing vehicle for the MoR remains the same. Hence, a default would probably disrupt the IR's ability to finance capital expansion, which is a strategic area of the country's economic plan.

Transport is one of four strategic sectors in India, and the railways accounted for 12% of India's total national infrastructure pipeline in FY20-FY25. A default by IRFC could be attributed to the government's leadership with grave political repercussions, given the importance of the company in providing funding to the railway sector and the its close operational ties with the MoR.

Contagion Risk 'Very Strong'

IRFC is the dedicated lending arm of the MoR. Over 98% of IRFC's leasing assets were loaned to IR as of end-December 2023. The contagion risk assessment is underpinned by the alignment of cost of borrowing with that of the government, which leads Fitch to believe that the market participants consider IRFC as the state's reference borrower. A default by IRFC could imply a failure of the MoR in honouring the obligations under the standard lease agreement. This may have material implications for the government's credibility and the financing for other state-owned GREs.

Operating Performance

IRFC's interest income rose by 3% to INR75 billion in FY23 and lease income by 26% to INR163 billion. In addition, interest income in 9MFY24 rose by 20% yoy to INR67 billion and lease income by 12% yoy to INR135 billion. The company has maintained low general and administrative costs, too. The cost-to-income ratio was 0.6% in FY23, and personnel expenses accounted for only 0.05% of total revenue. IRFC made no loan disbursements in 9MFY24. Assets under management remain closely tied with the MoR.

Derivation Summary

Fitch has assessed IRFC as a GRE that is credit-linked to the Indian sovereign. This reflects our assessment of the entity's 'Very Strong' decision-making and oversight, 'Very Strong' precedents of support, 'Strong' preservation of government policy role, and 'Very Strong' contagion risk. These factors mean it is virtually certain that IRFC will receive extraordinary state support, if needed.

The assessment translates into an overall support of 50 under our GRE criteria, which results in the equalisation of IRFC's IDR with that of the sovereign irrespective of the company's Standalone Credit Profile.

Debt Ratings

IRFC's USD2.25 billion in outstanding senior unsecured notes are rated at the same level as the Long-Term IDR of 'BBB-' because they constitute the company's direct, unconditional, unsubordinated and unsecured obligations and rank pari passu with all of its other outstanding unsecured and unsubordinated obligations. The notes were issued from the USD7.0 billion global medium-term note programme, which is also rated 'BBB-'.

Issuer Profile

IRFC, a non-banking financial company majority-owned by the Indian state, acts as the dedicated lending arm of the MoR. The company finances the acquisition of rolling stock assets, leasing of railway infrastructure assets, and lending to other entities under the MoR.

Liquidity and Debt Structure

IRFC's net gearing ratio has moderated in the past two years due to slow loan disbursement. The ratio was 8.54x at end-3QFY24, against 9.21x at FYE23 and 9.47x at FYE22.

IRFC has adequate asset and liability management, which is subject to the Reserve Bank of India's guidelines. Fitch believes that government support and the company's diversified funding sources should mitigate refinancing risks.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A downgrade of the Indian sovereign rating, material weakening in government's control and oversight, precedents of support, or incentive to support and thus lowering the overall support score to below 45.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Any positive movement or upgrade of the Indian sovereign rating would be reflected in IRFC's ratings.

ESG Considerations

Fitch does not assign ESG scores for IRFC, as the ratings and ESG profile are derived from the parent, India. ESG relevance scores and commentary for the sovereign can be found here.

Public Ratings with Credit Linkage to other ratings

IRFC's IDR is credit-linked to India's sovereign IDR.

References for Substantially Material Source Cited as Key Driver Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

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