Fitch Rates India-Based Continuum’s Proposed USD Notes First-Time ‘BB+(EXP)’, Outlook Stable
(The following statement was released by the rating agency) Fitch Ratings-Singapore-28 January 2021: Fitch Ratings has assigned Continuum Energy Levanter Pte. Ltd.’s (CELP) proposed US dollar senior secured notes due 2027 an expected rating of ‘BB+(EXP)’. The Rating Outlook is Stable. CELP is a subsidiary of Continuum Green Energy Ltd (Continuum), which is mainly involved in wind power generation in India. Continuum has a portfolio of about 1GW of generation capacity, of which around 757MW is operational, 154MW is under construction and 150MW is ready to construct. CELP plans to use the proceeds from the proposed notes mainly to refinance existing debt at operating entities within a restricted group of companies (referred to as Continuum RG1) that is defined in the indenture to the proposed note issue.
The operating entities plan to issue secured Indian rupee-denominated bonds to CELP as part of this debt refinancing. RATING RATIONALE The proposed six-year partially amortising US-dollar bond will be issued by CELP, which is a 100% owned subsidiary of Continuum. CELP will use the proceeds to subscribe to the Indian-rupee non-convertible debentures issued by the restricted group. The restricted group will use the proceeds to refinance its existing senior debt and working capital debt, and for the parent’s general corporate purposes. The rating on the proposed notes reflects the credit quality of a portfolio of four projects in wind-abundant states in India. The rating is also enhanced by a diversified pool of high-quality commercial and industrial (C&I) customers that pay on time and help offset the long payment cycles of state distribution companies.
The rating has considered the manageable refinancing risk arising from the balloon structure of the notes. Fitch assesses the financial profile of Continuum RG1 via the debt service coverage ratio (DSCR) over the refinancing period, assuming the outstanding principal of the notes will be refinanced upon maturity by a long-term amortising debt. The DSCR averages 1.69x under Fitch’s rating case, which incorporates reduced energy production, higher expenses and refinancing at a higher interest rate. The rating thresholds that Fitch apply in its rating analysis are the thresholds applicable to merchant projects.
A debt instrument’s rating is typically capped by the credit quality of its revenue counterparties. Fitch does not rate the state distribution companies that buy electricity from Continuum RG1 under the power purchase agreements (PPAs). However, exposure to multiple counterparties mitigates the risk. The interaction between Continuum RG1 and the state distribution companies is regulated by relevant laws and regulations at the central and state level, and replacement entities in case of failure to perform by the incumbent would need to adhere to these same regulations. Fitch considers exposure to these revenue counterparties to be in the form of a possible temporary liquidity stress rather than a constraint to the ratings. The state distribution companies have a history of payment delays and weak credit profiles. Therefore, Fitch believes that it will be prudent to have Continuum RG1 meet a higher threshold to achieve a same rating as other projects having counterparties with known and healthy creditworthiness, all else being equal.
Hence, Fitch has based the rating on the proposed notes on the indicative DSCR thresholds applicable to merchant projects instead of the ones for fully contracted projects, while the cash flows are evaluated based on the contracted prices, which constitutes a variation from Fitch’s Renewable Energy Project Rating Criteria. KEY RATING DRIVERS Long-Term, Fixed-Price PPAs: Revenue Risk (Price) − Midrange Continuum RG1 has a diversified customer pool, with 51.1% of capacity contracted with state distribution companies and 48.9% contracted with around 89 C&I customers.
However, the share of C&I customers will increase to 76.5% of capacity upon conversion of some expiring PPAs with state distribution companies to the open access route in 2027. The tariff paid by C&I customers varies with the change in the retail tariff for C&I users charged by state distribution companies (discom C&I tariff) and the various applicable open access charges. Generators and customers each pay half of the variation in the discom C&I tariff and open access charges. A third-party consultant believes that the discom C&I tariff will generally rise over time over the life of these projects and the relevant projections used in the financial model are prudent. Robust Energy Yield, Geographically Diversified – Revenue Risk (Volume): Midrange The energy yield forecast produced by third-party consultants and supported by the portfolio benefit analysis indicates an overall P50/one-year P90 spread between 6% and 16%, leading to a ‘Midrange’ assessment for volume risk. Curtailment risk is minimal as renewables enjoy “must-run” status in India.
Only very limited curtailment occurred in the Periyapatt project in the past, and management expects this to improve after the 400KV system is completed in 1Q21. The C&I customers are also incentivised to maximise offtake given the cost advantage compared with alternative sources, and the contracted volume of the Continuum RG1 projects forms only 50%-60% of the demand of a customer. Experienced Operator; Proven Technology: Operation Risk − Midrange Operation risk is assessed as Midrange owing to favourable production-based pricing mechanisms and comprehensive operating and maintenance (O&M) contracts, including both scheduled and unscheduled maintenance implemented by experienced teams.
O&M contracts have terms of seven to 15 years, longer than the debt tenor. Fitch believes it will not be difficult to find replacement operators upon expiry of the contracts as similar technology is used widely in India. All the plants use proven technology with a long operating history. Costs have not been verified by a third-party technical advisor, which is a weakness. The operating record of the plants is moderate, varying from months to eight years with a capacity weighted average of four years. Ring-Fenced Structure, Manageable Refinancing Risk – Debt Structure – Midrange The proposed bonds are issued in a two-part structure used commonly by Indian renewable transactions. Noteholders are protected by the ring-fenced structure and covenants.
The notes pay fixed interest rates and the currency risk arising from changes in the US dollar-Indian rupee exchange rate will be mitigated by entering into a currency hedging arrangement. Noteholders benefit from a lock-up test at backward-looking graded DSCRs. No additional indebtedness is allowed other than a working-capital basket of USD35 million. Nearly 8% of the note principal will amortise over the note life. The refinancing risk exposure is mitigated by a cash trap from year 1.5 and the mandatory cash sweep and cash lock-up for about 38.75% of the principal from year 1.5. The refinancing risk of the remaining 53.25% of the principal is low given the assets’ good access to banking and capital markets and their longer operating record by the time the notes mature. PEER GROUP Continuum RG1 is rated a notch higher than Azure Power Solar Energy Private Limited (Azure RG2, senior secured rating BB/Stable). Azure RG2 is a pure solar portfolio, which is likely to have lower variation in production compared with Fitch’s forecast. Nevertheless, Continuum RG1 benefits from a much stronger average DSCR of 1.69x in Fitch’s rating case against Azure RG2’s average of 1.45x.
Although Continuum RG1 faces a variable price structure in its contracts with C&I customers, which results in a ‘Mid-range’ revenue-price risk assessment compared with ‘Stronger’ for Azure RG2, Continuum RG1 benefits from better receivable days given timely payments from these consumers. About 78% of Azure RG2’s capacity is contracted with state-owned distribution companies while the rest is with sovereign-backed off-takers. Although, the overall debt structure of both RGs is assessed as ‘Midrange’, Continuum RG1 has tighter covenants, including lock-up tests based on graded DSCRs, partial amortisation, cash trap from year 1.5 and a mandatory cash sweep. Continuum RG1 can be also compared to Adani (NS:APSE) Green Energy Limited Restricted Group 1 (AGEL RG1, BB+/Stable) and Adani Green Energy Limited Restricted Group 2 (AGEL RG2, BBB-/Negative).
Like Azure RG2, AGEL RG1 and RG2 are solar portfolios with counterparties comprising state distribution companies and sovereign-backed off-takers. However, AGEL RG1 and RG2 have tighter structures, with direct issuance by the operating entities as opposed to the two-tier structure used by Continuum RG1. AGEL RG2 has less exposure to refinancing risk as most of the note principal is amortising. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: No rating upgrade is expected in the near term given the uncertainty around the debt refinancing, renewal terms for maturing contracts and PPAs, the future discom C&I tariff and open access charges applicable for C&I projects.
Factors that could, individually or collectively, lead to negative rating action/downgrade: Average synthetic annual DSCR in the Fitch rating case dropping below 1.6x persistently, which could result from: – Energy production underperforming long-term projections due to low renewable resources or operational issues; or – Working capital issues due to off-takers’ payment delays; or – Failure to renew maturing PPAs or renewal at terms that are less favourable than the current terms; or – Less favourable future tariff for distribution companies and open access charges applicable for C&I projects than projected; or – Less favourable refinancing terms and structure than the assumptions made in Fitch’s rating case.
Best/Worst Case Rating Scenario International scale credit ratings of Sovereigns, Public Finance and Infrastructure 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 three 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].
TRANSACTION SUMMARY Continuum RG1 is a restricted group consisting of four renewable projects comprised mainly of wind farms in India. The projects are owned by Continuum and they have total capacity of 722.9 MW. The proposed issuance is INR41 billion (about USD568 million) of six-year senior secured notes. The proceeds will be used to refinance the existing rupee-denominated debt and working capital loans, and for general corporate purposes. The notes will be cross-guaranteed on a senior basis among the restricted entities. FINANCIAL ANALYSIS For Fitch’s base case, we include the P50 energy production assumption and a 7% production haircut to capture the ‘Midrange’ volume risk assessment and the higher uncertainty of wind resources. We also apply more conservative projections for the discom C&I tariff and open access charges for projects in Gujarat by keeping it constant at the level for the financial year ending March 2021 (FY21), while the tariff and charges for other projects are adopted as per the third-party market advisor’s forecasts, which shows the net tariff declines overtime and seems prudent.
Fitch’s rating case assume a one-year P90 energy yield with portfolio benefit, 7% production haircut and 15% stress on non-contracted operating expenses. The rating case assumes the same projections for the discom C&I tariff and open access charges as in the Fitch base case. Given the balloon structure of the notes, Fitch assumes the notes will be refinanced upon maturity by fully amortising debt across the remaining PPA terms at a higher refinancing interest rate of 12%, reflecting the uncertainty at the time of maturity in 6 years. Fitch’s base case generates an average annual DSCR of 2.04x over the refinancing period with a minimum of 1.77x and the average leverage, defined as net debt to EBITDA, for the bond period being 3.9x. Incorporating additional operational and refinancing stress, Fitch’s rating case generates an average annual DSCR of 1.69x over the refinancing period, with a minimum of 1.57x, and the average leverage for the bond period being 4.6x. Criteria Variation Fitch has based the rating on the proposed notes on the indicative DSCR thresholds applicable to merchant projects instead of the ones for fully contracted projects, while the cash flows are evaluated based on the contracted prices, which constitutes a criteria variation from Fitch’s Renewable Project Rating Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg Continuum Energy Levanter Pte. Ltd. —-Continuum Energy Levanter Pte. Ltd. /Senior Secured Debt/1 LT; Long Term Rating; Expected Rating; BB+(EXP); Rating Outlook Stable Contacts: Primary Rating Analyst Aseem Modwal, Associate Director +65 6796 2713 Fitch Ratings Singapore Pte Ltd. One Raffles Quay #22-11, South Tower Singapore 048583 Secondary Rating Analyst Harini Ravishankar, Senior Analyst +65 6796 7220 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com Additional information is available on www.fitchratings.com Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Third-party Model(24 March 2020 (https://www.fitchratings.com/site/re/969858)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10150585) Solicitation Status (https://www.fitchratings.com/site/pr/10150585#solicitation-status) Additional Disclosures For Unsolicited Credit Ratings (https://www.fitchratings.com/site/pr/10150585#unsolicited-credit-ratings-disclosures) Endorsement Status (https://www.fitchratings.com/site/pr/10150585#endorsement-status) Endorsement Policy (https://www.fitchratings.com/site/pr/10150585#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH’S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory).FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved.
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