Moody’s Investors Service (Moody’s) has downgraded Pakistan Water and Power Dev Authority’s (WAPDA) corporate family rating (CFR) to Caa3 from Caa1 and Baseline Credit Assessment (BCA) to caa3 from Caa1.
At the same time, Moody’s has changed the outlook to stable from negative. This rating action follows Moody’s rating action on the government of Pakistan (Caa3 stable) on 28 February 2023.
“The rating action on WAPDA reflects the close linkage of its credit quality with that of the Government of Pakistan, given the government’s full ownership and direct supervision of the company, as well as the fact that WAPDA operates solely in Pakistan,” says Yong Kang, a Moody’s Analyst.
WAPDA’s Caa3 CFR is primarily driven by its caa3 BCA, and Moody’s assessment of a high likelihood of support from, and a very high dependence on, the government of Pakistan when needed, under Moody’s Joint Default Analysis (JDA) for government-related issuers.
As a dominant hydropower supplier in Pakistan receiving recurring financial support from the government, WAPDA’s BCA considers the sovereign’s weak credit quality and default risks consistent with a Caa3 rating.
The company’s weak financial profile reflects an unpredictable regulatory framework and an inability to sufficiently recover costs in a timely manner, leading to delayed tariff decisions and a long receivable cycle. Moody’s projects WAPDA’s funds from operations (FFO) to debt ratio will remain weak at the low-single-digit percentage over the next one to two years. At the same time, its liquidity will continue to be weak because of its substantial current borrowings and large capital spending. WAPDA did not repay certain government loans as per the agreed repayment schedule, and Moody’s expects such a situation to continue.
Moody’s expectation of a high likelihood of government support for WAPDA considers the Pakistani government’s full ownership and direct supervision of the company. It also reflects the company’s strategic importance to the government as it is an important platform that (1) constructs and operates hydropower assets to supply affordable electricity in Pakistan, and (2) builds water storage facilities to help address the country’s acute water challenges.
However, such considerations are offset by the risks stemming from the government’s low policy predictability and transparency. In addition, the financial challenges faced by the government, as reflected in its Caa3 ratings, indicate its limited capacity to provide support to WAPDA.
In terms of environmental, social, and governance (ESG) factors, Moody’s has considered that WAPDA is exposed to environmental risks because of physical climate risks in the form of extreme weather patterns and risks related to water management and natural capital.
As for social risk considerations, Moody’s has factored in the weak track record of timely tariff adjustments, driven by affordability concerns. Moody’s has also considered WAPDA’s governance risks, arising from the company’s high financial leverage, relatively weak risk management as indicated by the technical fault and cost overrun, and concentrated ownership.
The stable outlook on the rating mirrors the stable outlook on Pakistan’s sovereign ratings based on Moody’s expectation that the relationship between WAPDA and the government remains intact at least over the next 12-18 months.
Moody’s could upgrade WAPDA’s rating if the agency upgrades the sovereign ratings and there is no material change in the relationship between WAPDA and the government.
Conversely, Moody’s could downgrade WAPDA’s rating if Pakistan’s sovereign rating is downgraded.
