Fitch Affirms Neerg Energy’s USD475 Million Notes at ‘BB-
Fitch Ratings has affirmed the rating of Neerg Energy Ltd’s USD475 million senior unsecured notes due 2022 at ‘BB-‘.
The rating on the notes reflects the credit profile of a restricted group (RG) of subsidiaries owned by ReNew Power Private Limited (ReNew; BB-/Stable). The RG has an operating capacity of 606MW in wind (66% of total capacity) and solar (34%) power generation in India. We understand India Green Power Holdings (IGPH), a financing vehicle held by a trust whose ownership is not linked to ReNew, raised USD460 million in notes (rated: BB-(EXP)/Stable) in February 2021, which will be used to subscribe to non-convertible debentures (NCD) to be issued by the entities in the RG. The entities will use the proceeds to repay masala bonds issued to Neerg Energy, which in turn will repay its outstanding USD475 million bond.
The IGPH bond is currently under settlement and Neerg Energy’s 2022 bond is scheduled to be prepaid in April 2021. The completion of the refinancing addresses any liquidity and refinancing risks at Neerg Energy and its operating entities. Neerg Energy is a SPV held by a trust and its ownership is not linked to ReNew. The SPV used the proceeds of the US dollar notes to subscribe to the masala bonds – offshore bonds denominated in Indian rupee, but settled in US dollars – issued by the entities in the RG. Key Rating Drivers Rating Uplift on ReNew Linkages:
The moderate linkages with ReNew result in Fitch applying a one-notch uplift to the RG’s credit profile. Legal linkages between the two are supported by the terms of ReNew’s bonds, including a default on USD75 million or more at any of its restricted subsidiaries can result in an event of default on ReNew’s bonds. Only two operating entities in the RG have that much debt, but all RG subsidiaries provide cross guarantees. Therefore, a default by any one of them will trigger a cross-default with ReNew’s bonds. ReNew provided liquidity support to the RG in the financial year ended March 2020 (FY20) and FY21, further evidence of the linkages between Neerg Energy and ReNew. However, the uplift is limited to a notch, as cross-default provisions are significantly less robust than guarantees and we consider the RG to be only of moderate strategic importance to ReNew due to its small size relative to ReNew’s total capacity, likely to reach around 10GW in the next two-to-three years.
Refinancing Risk Mitigated:
The refinancing risk of the US dollar notes has been eased as Neerg Energy expects to repay them in April 2021 before they are due in February 2022 from the proceeds of the recent fund raising. IGPH’s recent bond proceeds of USD460 million and the funds the company expects to receive from a hedge settlement will ultimately be used to prepay Neerg Energy’s US dollar notes.
Temporary Dip in Operating Performance: The RG’s wind-based generation, 66% of total capacity, suffered in 1HFY21 due to a weaker wind season, resulting in EBITDA generation falling by 21% yoy. Plant load factors (PLF) were also affected by operational issues faced by some RG assets. We expect average PLF in FY21 to dip to 18.8% from 21.2% in FY20 before recovering to 22% in FY22, driven by our expectation of wind generation reverting to normal levels. Financial Profile to Recover: Fitch expects the RG’s financial ratios to recover in FY22, supported by positive cash flows from operations with PLFs reverting to normal levels and expected improvement in receivables. We expect the RG’s EBITDA net interest coverage to improve to 1.7x in FYE22, after a dip in FY21 to 1.4x from 1.7x in FY20, while net leverage (net debt/operating EBITDA) is forecast to fall to 5.2x in FY22 from around 6.4x in FY21.
Seasoned Portfolio, Diversified Operations: The RG’s portfolio, spread across six Indian states, has an adequate record, with capacity-weighted average operating life of around 5.8 years. Capacity rose to 606MW with the addition of a 95MW solar project, Mirpur and Malkanoor, in March 2019, which expanded the share of more stable solar assets in the portfolio to 34%, from 22%, with the remainder in wind assets. Weak Counterparty Profile: The rating on the notes reflects the weak credit profile of the RG’s key counterparties – state-owned power-distribution utilities – which account for about 83% of its off-take. The rest of the off-take is sold directly to corporate customers.
The utilities in Andhra Pradesh, Maharashtra and Telangana account for around 65% of off-take, resulting in some concentration risk. Long Receivable Days: The weak financial profiles of the state-owned utilities and the large share of off-take sold to utilities from Andhra Pradesh (30%) increased the RG’s trade receivable days to 334 in September 2020, from 228 in March. We expect the receivables to improve marginally to 283 days in FY22 as the disbursements from the government’s INR1.2 trillion liquidity support package gathers pace. Any further material improvement in receivables would depend on timely resolution of the court case over Andhra Pradesh state’s attempt to renegotiate tariffs in its power-purchase agreements (PPA) with renewable power companies, assuming the decision is in favour of the power producers. Price Certainty, Volume Risk: The RG’s assets benefit from long-term PPAs for all of them, with tenors of 13-25 years for state utility contracts and seven-10 years for direct sales.
The long-term PPAs provide protection from price risk, but production volume will vary with resource availability, which is affected by seasonal and climatic patterns. We believe the attempts by distribution utilities in Andhra Pradesh to renegotiate tariffs in their PPAs will be unsuccessful. Any tariff revision will be treated as an event risk.
Foreign-Exchange Hedging : The RG’s earnings are in rupees, but the notes are denominated in US dollars. However, the SPV has fully hedged its semi-annual coupon payments and substantially hedged the principal through call spreads till INR100 equals USD1. There is also a 7.5% redemption premium on the masala bonds issued by the RG’s operating entities, which is payable to the SPV, providing an additional cushion. Derivation Summary ReNew RG II (US dollar notes: BB) has a higher proportion of more-stable solar assets (56% of total capacity, with the rest from wind assets) than Neerg Energy and more exposure to industrial and commercial customers, which account for 25% of off-take. We expect ReNew RG II to benefit from higher EBITDAR net interest cover of 2x, helped by covenanted interest income on initial advances to its parent.
This, together with restrictions on additional debt (excluding working-capital debt) and an interest service reserve account covering six months of interest, results in the US dollar notes of ReNew RG II being rated two notches above standalone credit assessment of Neerg Energy’s RG. Azure Power Energy Ltd. (APEL, US dollar notes: BB-) benefits from exposure to stable and predictable solar-based power plants and a lower counterparty risk profile, with a third of its capacity contracted to sovereign-backed counterparties. APEL has a stronger net interest coverage ratio, which Fitch expects to be above 2.0x by FY22. These factors result in APEL’s notes being rated one notch higher than Neerg Energy’s standalone credit assessment. Concord New Energy Group Limited (CNE, BB-/Negative) has an attributable wind capacity of 2,277MW across multiple projects in China. CNE’s feed-in tariffs are stable and its counterparty risk is significantly lower than that of Neerg Energy, as its revenue stream is mostly reliant on State Grid Corporation of China (A+/Stable) and China’s Renewable Energy Subsidy Fund.
Fitch expects CNE’s interest cover to also be stronger at around 3x, compared with Neerg Energy’s less than 2x. Hence, Neerg Energy RG’s standalone credit profile is assessed at one notch lower than the rating on CNE. Key Assumptions Fitch’s Key Assumptions Within Our Rating Case for the Issuer: – Plant-load factors ranging from 15% to 26% for all assets – Plant-wise tariffs in accordance with respective PPAs – Average EBITDA margins of around 89% over the medium term –
Average receivable days to improve to around 283 by FY22 (FY20: 228 days, FY21: 321 days) – USD475 million bond to be prepaid in full using the proceeds IGPH raised in February 2021 and no change in rupee debt at the RG’s operating entities RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: – Upgrade of ReNew’s Issuer Default Rating (IDR), while maintaining linkages with the RG along with an improvement in the RG’s EBITDA net interest cover to above 2.0x and net leverage, measured by net debt/operating EBITDA, of less than 4.5x on a sustained basis Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Downgrade of ReNew’s IDR or weakening of its linkages with the RG – EBITDA net interest cover not meeting Fitch’s expectation of above 1.5x over the medium term – Significant and sustained deterioration of the RG’s receivable position – Failure to adequately mitigate foreign-exchange risk Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years.
The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure Adequate Liquidity: The US dollar notes that mature in February 2022 represent the majority of the RG’s borrowings. Completion of the refinancing of the outstanding bonds through the USD460 million in proceeds from the IGPH bond will address Neerg Energy’s liquidity risks.
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