India Ratings Revises Outlook on Rajkot (Gujarat) Solar’s Bank loans to Stable; Affirms ‘IND BBB+’
India Ratings and Research (Ind-Ra) has taken the following rating actions on Rajkot (Gujarat) Solar Energy Private Limited (RGSEPL) bank loans:
| Instrument Type | Date of Issuance | Coupon Rate (%) | Maturity Date | Size of Issue (million) | Rating/Outlook | Rating Action |
| Term loan | – | – | 31 March 2036 | INR2,218 (INR2,119.2 outstanding) | IND BBB+/Stable | Affirmed; Outlook revised to Stable from Negative |
The Outlook revision to Stable from Negative reflects RGSEPL’s improved generation with 7MFY21 plant load factor (PLF) being better than the historical years and in line with the P90 levels. The affirmation reflects the firm offtake arrangement and the support from the sponsor Hero Solar Energy Private Limited (HSEPL).
KEY RATING DRIVERS
Improved generation in FY21: RGSEPL’s PLF improved by 4.21% yoy in 7MFY21 and was in line with the annual P90 estimate. The PLF sustaining at P90 level is a key rating monitorable.
Low Offtake Risk: The rating reflects high revenue visibility, indicated by a long-term, fixed-price power purchase agreement (PPA) with Madhya Pradesh Power Management Company Limited (MPPMCL) for the entire capacity. In case MPPMCL refuses to buy power under the PPA, RGSEPL is allowed to sell power to third parties. If the tariff realised through third-party sale is lower than INR5.46/kWh (the contracted PPA tariff), MPPMCL will have to meet the shortfall. Also, MPPMCL will have to compensate RGSEPL for any quantum of power that could not be sold to a third party. The compensation indicated, as a part of the PPA, is a unique feature and lends strength to cash flows in the event of a contract repudiation by distribution companies (discoms).
Strong Sponsor: HSEPL has a track record of about three years of supporting other subsidiary special purpose vehicles in times of cashflow distress to enable timely debt payments, averting the use of debt service reserve as a fall back. The agency expects support from the sponsor in times of cashflow distress, especially arising from delays in receivables from counterparty or generation shortfall, although not specified in the loan agreement. HSEPL has provided various undertakings, including retaining of management control to the lenders.
The sponsor has commissioned over 1,500MW of renewable energy projects in the past broadly within the timeline. HSEPL is the solar energy arm of Hero Future Energies Private Limited (HFEPL), which is owned by Hero Motorcorp Limited’s promoter group companies – Bahadur Chand Investments Private Limited and Brijmohan Lal Om Prakash. HFEPL received equity infusions of USD125 million from International Finance Corporation and IFC Global Infrastructure Fund, and USD150 million from Masdar group, owned by the government of Abu Dhabi during FY18-FY20.
Liquidity Indicator – Adequate: The agency expects the project company to maintain adequate liquidity in the form of internal accruals or temporary support from the sponsor/group companies to meet counterparty and generation shortfalls.
As on 14 October 2020, RGSEPL had a cash balance of about INR155 million, equivalent to six and a half months of debt servicing. Payments from MPPMCL are received within one-to-two months; although it is 30 days from the date of billing as stipulated in the PPA. There is no requirement of creating of a debt service reserve account (DSRA) as per stipulations. Regular payments from MPPMCL support the liquidity assessment for RGSEPL. The company’s debt service coverage ratio (DSCR) remains comfortable with an average DSCR of above 1.15x, even if the working capital facility is accessed to cover four months of revenue assuming a margin money of 25%.
Standard Technology: The project uses polysilicon solar panels, manufactured by Trina Changzhou Trina Solar Energy Company Limited, and single-axis trackers, supplied by Scorpius Trackers Private Limited.
Moderate Operating Risk: The operations of a solar project are of a low complexity. RGSEPL has signed a fixed-price, fixed-escalation operations and maintenance (O&M) contract with HSEPL for 25 years. Operating expenses (excluding one-time and non-cash items) are in line with the base case estimates. Ind-Ra will continue to monitor the level of operating expenses.
Counterparty Risk: The rating is constrained by the financial profiles of Madhya Pradesh discoms. Payments are received within one-to- two months from billing. Although tariffs for renewable energy projects have seen a steep fall, Ind-Ra expects the PPAs signed at higher tariffs to be adhered. Any termination or renegotiation effort on the PPA will be treated as an event risk. Also, the must-run status accorded to renewable energy, ensures offtake, irrespective of the renewable energy tariff.
Debt Structure: The debt amortises in 72 structured quarterly instalments, starting September 2018. The project does not feature any debt service reserve; however, dividend distribution will be annual after the testing of the financial covenants. The absence of a debt service reserve exposes the project to a counterparty risk in the absence of a timely sponsor support after the working capital has been exhausted. The financial covenants include maintenance of maximum long-term debt to adjusted tangible net worth of 4.00x, minimum DSCR of 1.10x and minimum security cover ratio of 1.2x. According to RGSEPL, the covenants for FY20 have been complied with.
As per management, shareholder loan was converted into deemed contribution in FY20, forming part of net worth, with no increase in external debt, thereby bringing the ratio of long term debt to adjusted net worth within the stipulated level. Any adverse action, including a levy of penal interest by the lender, could lead to a negative rating action. RGSEPL extended a short-term loan of INR200 million to Hero Wind Energy Private Limited. RGSEPL had availed the Reserve Bank of India-prescribed moratorium under the COVID-19 relief package during April to May 2020. The interest amount has been converted into a deferred interest term loan.
RATING SENSITIVITIES
Negative: PLF reducing below 21.9% in the next two years, a sharp increase in payment delays from the off-taker to six months from billing, an adverse action by the lenders, an increase in operating expenses beyond base case assumptions and absence of sponsor support in the event of a cash flow stress, could lead to a negative rating action.
Positive: Future developments that could, individually or collectively, lead to a positive rating action are:
- demonstrated consistent operating track record, including PLF at or near P75 estimates for at least two consecutive years;
· regular tariff receipts from the counterparty;
· creation and maintenance of adequate liquidity and a minimum DSCR of 1.15x.
COMPANY PROFILE
RGSEPL operates a 43MW solar project in Madhya Pradesh. It has signed a 25-year PPA with MPPMCL at a fixed tariff of INR5.46/kWh. The project was awarded through tariff-based competitive bidding. The project was fully commissioned ahead of the stipulated date in the PPA and was implemented in a debt/equity ratio of 80:20.
FINANCIAL SUMMARY
| Particulars | FY20 | FY19 |
| Revenue (INR million) | 444 | 489 |
| EBITDA (INR million) | 345 | 322 |
| EBITDA interest coverage (x) | 1.70* | 1.68* |
| *Interest on term loan has been considered; excludes interest on subordinated funds from sponsor
Source: Company financials |
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RATING HISTORY
| Instrument Type | Current Rating/Outlook | Historical Rating/Outlook | ||||
| Rating Type | Rated Limits (million) | Rating | 4 December 2019 | 23 October 2018 | 6 October 2017 | |
| Term loan | Long-term | INR2,218 | IND BBB+/Stable | IND BBB+/Negative | IND BBB+/Stable | IND BBB+/Stable |
COMPLEXITY LEVEL OF INSTRUMENTS
For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.
SOLICITATION DISCLOSURES
Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.
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Source: indiaratings.co.in
