(The following statement was released by the rating agency) Fitch Ratings-Singapore-03 February 2021: Fitch Ratings has assigned India Green Power Holdings’ (IGPH) proposed US dollar senior secured notes due 2027 an expected rating of ‘BB-(EXP)’. The Rating Outlook is Stable. The rating on the proposed notes reflects the credit profile of a restricted group of operating entities under ReNew Power Private Limited (ReNew Power, BB-/Stable), one of the largest renewable-energy independent power producers in India with total operating capacity of 5.7GW and under-construction capacity of 4.5GW.
IGPH is a financing vehicle that will be held by a trust and its ownership is not linked to ReNew Power. IGPH will use the proceeds of the proposed notes to subscribe to non-convertible debentures (NCDs) to be issued by the entities in the restricted group. The entities will use the proceeds to repay masala bonds issued to Neerg Energy Ltd, which in turn will repay its outstanding USD475 million bond (rated BB-). IGPH will not undertake any business activity other than investing in the NCDs.
The rupee-denominated NCDs will be guaranteed by ReNew Power, but the guarantee does not enhance the rating on IGPH’s proposed notes as the credit risk profile of the restricted group is assessed as similar to that of ReNew Power. RATING RATIONALE The rating reflects the underlying credit profile of the restricted group, which is assessed at ‘bb-‘. Deterioration in the restricted group’s underlying credit profile will not affect the rating on the proposed bonds as the rating will then be based on ReNew Power’s guarantee. The credit profile of the restricted group is supported by the renewable assets’ long and reasonable operating record. All of the wind and solar projects have been operating for 4 to 9 years, with capacity-weighted average record of 5.8 years.
The restricted group contracts 80% of its total capacity with state distribution companies under long-term, fixed-price power purchase agreements (PPAs). There is a gap of about 20% between the assets’ P50 and one-year P90 energy yield forecasts. However, the assets’ operating performance has been adequate over the last three years. The assessment is constrained by IGPH’s exposure to weak state-owned distribution companies like those in Andhra Pradesh and its average debt service coverage ratio (DSCR) over the refinancing period of 1.44x. Fitch’s rating case DSCR of 1.44x includes annual interest income at 8% of the intercompany loans extended to the parent over the life of the assets. The management plans to upstream the restricted group’s cash available after debt-servicing requirements to the parent to support the group’s growth, while committing to pay the 8% interest income to the restricted group to maintain adequate liquidity at the restricted group.
However, IGPH will retain all the cash generated in the last year of the bond tenor within the restricted group to reduce refinancing risk. KEY RATING DRIVERS Proven Technology, Lack of Maintenance Reserve – Operation Risk: Midrange The technologies deployed in IGPH’s wind and solar projects are considered proven. The wind turbines are procured from some of the world’s largest manufacturers while the solar modules are sourced from internationally well-known suppliers (First Solar and Hareon Solar). Operation and maintenance (O&M) for the wind projects is carried out by the original equipment manufacturers under 10-20 year-long contracts. The O&M for the solar projects is carried out by an affiliate company, ReNew Services Private Limited, under five-year fixed-price contracts, with 4% to 5% annual price escalation.
The operation risk assessment is constrained to ‘Midrange’ as the operating cost forecast is not validated by an independent technical advisor and a maintenance reserve account is not present in the bond indenture. Wide Forecast Spread, Adequate Operating Performance – Revenue Risk (Volume): Weaker The energy yield forecast produced by third-party experts indicates an overall P50/1-Year P90 spread of 20%, leading to a ‘Weaker’ assessment for volume risk. The portfolio has capacity-weighted average record of 5.8 years with all assets operating for more than four years. The actual load factors recorded by the portfolio in FY18-FY20 (financial year ends in March), the full years of operation for all the assets, were moderately volatile.
Hence, we apply a lower haircut at 7% on volumes forecast in our base case and rating case. The curtailment risk is limited in India given the “must-run” status of renewable projects. Fixed Long-Term Prices for Most Contracts, Low Renewal Risk – Revenue Risk (Price): Midrange The restricted group contracts 80% of its total capacity with state distribution companies under long-term, fixed-price PPAs, which protects the portfolio from merchant price volatility. These PPAs have capacity-weighted residual life of about 18 years. The PPAs with commercial and industrial customers have tenors generally ranging from 5 to 10 years. Tariffs for captive wind projects are determined at a discount to grid tariffs.
Contract renewal and tariff renegotiation risk is mitigated by increasing grid tariffs and minority equity ownership of end-customers in respective projects. Partially Amortising Bond, Refinancing Risk – Debt Structure: Midrange IGPH, which will issue the proposed six-year (door to door) partially amortising senior secured bond, does not have any equity interest in the operating entities. It is only a secured lender to the operating entities, which are owned by ReNew Power. The bondholders will benefit from partial amortisation starting from Year 3, which will result in a bullet maturity of about 71% of the principal. The rupee-denominated NCDs benefit from usual protective structural features, including a distribution lock-up at 1.15x the 12-month backward-looking debt service coverage ratio. The restricted group does not maintain a debt service reserve account and major maintenance reserve account.
However, ReNew Power plans to support the cash flows by reversing USD15 million of inter-company loans that the restricted group extended to the parent over FY24-FY26. IGPH will also retain all the cash generated in the last year of the bond tenor within the restricted group. The parent has also provided an undertaking to provide cash interest at 8% of the inter-company loans even beyond the bond tenor to maintain adequate liquidity in the restricted group. The refinancing risk is mitigated by the remaining tenor of the PPAs, which extend beyond the maturity of the bond. Management plans to hedge the principal and coupon payments of the proposed bond for 5.5 years. The hedging arrangement and the par call period would be aligned to eliminate any need for a mid-term rollover requirement.
IGPH would be obligated to extend the hedges beyond 5.5 years in the remote scenario of the bonds continuing to be outstanding. PEER GROUP Continuum Energy Levanter Pte. Ltd.’s (CELP, senior secured notes: BB+(EXP)/Stable) portfolio configuration is similar to that of IGPH in terms of resource exposure, with 90% of CELP’s capacity from wind versus 78% for IGPH. However, CELP benefits from a lower gap of 12% in its P50/1-year P90 projections compared with IGPH’s 20%. CELP also has a larger 49% share of capacity contracted directly with commercial and industrial customers, compared with IGPH’s 20%, resulting in a better receivable profile. At the same time, CELP’s debt structure is stronger than IGPH’s with covenanted amortisation of 48% of the bond value over the bond tenor against IGPH’s 29% amortisation. CELP also benefits from much stronger average DSCR of 1.69.
As a result, CELP’s secured notes are rated two notches above those of IGPH. Azure Power Solar Energy Private Limited (APSEPL, senior secured notes; BB/Stable) benefits from a pure solar portfolio and 15% of capacity contracted with sovereign-owned Solar Energy Corporation of India Ltd. Combined, this results in a notch higher rating than IGPH, in spite of APSEPL’s bullet debt maturity and comparable average DSCR of 1.42x. IGPH’s bonds are assessed at same level as those of ReNew Power Private Limited Restricted Group 3 (ReNew RG3, BB-/Stable). ReNew RG3’s credit assessment reflects the rating on its parent, ReNew Power.
In Fitch’s rating case, ReNew RG3 would need the parent to return USD100 million of inter-company loans during the bond’s tenor to avoid a default. IGPH’s assets are fairly comparable with that of ReNew RG3, which had 67% of capacity from wind and the rest from solar. ReNew RG3’s counterparty exposure is also comparable, with 77% of capacity contracted with state-owned distribution companies, and the rest with commercial and industrial customers.
ReNew RG3’s bond has a bullet maturity, but its average DSCR is tad higher at 1.49x. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: Synthetic DSCR consistently above 1.45x without meaningful contribution of interest income from the parent on inter-company loans to cash flows available for debt servicing An upgrade of the rating on the parent Factors that could, individually or collectively, lead to negative rating action/downgrade: A downgrade of the parent, given interest income from the parent on inter-company loans accounts for a significant portion of cash flows available for debt servicing during refinancing period 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 The restricted group consists of 11 renewable projects with total capacity of 510.9MW, including 400.9 MW (78%) of wind assets and 110.0MW (22%) of solar projects. They have a capacity-weighted average record of 5.8 years. The projects are spread across five states of India. About 80% of total capacity is contracted with state-owned distribution companies and the rest is signed-up with commercial and industrial customers. IGPH is a Mauritius-based SPV that will issue the US-dollar bullet bond and use the proceeds to subscribe to the Indian-rupee NCDs issued by operating entities within a restricted group defined in indenture to the bond. The NCD proceeds will be used to repay the debt of the restricted group, for distribution to shareholders and other corporate uses as permitted under the end-use guidance. The NCDs benefit from a full-term guarantee by ReNew Power. FINANCIAL ANALYSIS Fitch includes USD15 million of inter-company loans extended to the parent, which ReNew Power will reverse over FY24-FY26 in its base case and rating case. Fitch also assumes the parent will pay IGPH annual interest income of 8% of the inter-company loans throughout the life of assets, as committed by management. We further assume that the outstanding US-dollar bond at maturity will be refinanced by another debt that will amortise across the remaining PPA terms or the projects’ useful life, whichever is longer. We focus on the average annual DSCR over the refinancing period given largely bullet structure of the bond. About 35% of the restricted group’s capacity is contracted with the state-owned distribution company in Andhra Pradesh. We do not expect attempts by the Andhra Pradesh government to renegotiate tariffs in its PPAs to be successful. The higher receivable days put pressure on the restricted group’s cash flows. We assume associated receivable days will increase further by FYE21 (FYE20: 468 days) before coming down conservatively to 300 days by FYE22 in our rating case. Any tariff revision will be treated as event risk in our credit assessment of the restricted group’s bonds. Fitch’s base case further assumes P50 generation, a 7% production haircut and a 13% refinancing interest rate, which results in an average annual DSCR of 2.16x during the refinancing period. Fitch’s rating case assumes one-year P90 generation and a 7% production haircut. For wind projects contracted with captive/third-party customers, we assume a tariff of INR5.5/kwh, which is equal to the lowest price in the India Energy Exchange in the past 10 years plus additional surcharges. We also apply a 15% stress on management’s operating expense forecast and a 13% refinancing interest rate. Our rating case results in an average annual DSCR of 1.44x. SECURITY Holders of the US-dollar bond benefit from a 100% share pledge by IGPH and charge over all assets of IGPH, excluding its Indian assets. The rupee NCDs benefit from a standard security package, including charge over movable and immobile assets, and share pledge over a 51% stake in the restricted entities. While this provides the US dollar noteholders only an indirect access to the NCDs’ security package, this is a common issuance structure adopted by several other Fitch-rated transactions. 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 Energy Project Rating Criteria. Date of Relevant Committee 02 February 2021 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. PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS The ratings of IGPH’s bonds are directly linked to the credit quality of its parent, ReNew Power. A change in Fitch’s assessment of the credit quality of the parent would automatically result in a change in the rating on the bond. 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 India Green Power Holdings —-India Green Power Holdings/senior secured/1 LT; Long Term Rating; Expected Rating; BB-(EXP); Rating Outlook Stable Contacts: Primary Rating Analyst Rachna Jain, Director +65 6796 7227 Fitch Ratings Singapore Pte Ltd. One Raffles Quay #22-11, South Tower Singapore 048583 Secondary Rating Analyst Aseem Modwal, Associate Director +65 6796 2713 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.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). 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