India Ratings Upgrades Mahindra Renewables’ Senior Term Loans to ‘IND A+’/Stable – EQ Mag Pro

India Ratings and Research (Ind-Ra) has upgraded Mahindra Renewables Private Limited’s (MRPL) senior project term loans to ‘IND A+’ from ‘IND A-’. The Outlook is Stable. The detailed rating action is as follows:

*Term loan sanctioned for Rewa Ultra Mega Solar Limited’s (RUMSL) project
#Term loan sanctioned for Solar Energy Corporation of India’s (SECI) project

Ind-Ra has analysed the standalone credit profile of the two projects housed within MRPL – a 250MW solar power project in RUMSL solar park in Madhya Pradesh (Rewa project) and a 250MW inter-state transmission system solar power project (SECI project) in Jodhpur, Rajasthan – to arrive at the ratings.

The senior debt availed for the projects has a separate escrow mechanism without any fungibility of funds. Hence, the ratings are constrained by the weaker of the two projects through the natural cross-default provision as both projects are within the same entity. While MRPL also acts as a holding company for its three subsidiary companies, the management has confirmed that all support undertakings given by MRPL to its subsidiaries as parent/promoter have fallen off.

For both the projects, the sponsor fund infusions, other than plain vanilla equity-like unsecured promoter loans in the form of quasi-equity, are subordinated to the senior project loans and have not been considered as additional debt in Ind-Ra’s analysis. In line with the financial agreements and management representation, these instruments do not have any right to call an event of default, and any change in this position will negatively affect the ratings.

The upgrade reflects the full commissioning of the SECI project within the timelines, and the receipt of payments from the counterparty for the Rewa and SECI projects within 30 days and 57 days, respectively. The ratings also factor in an improvement in debt coverages than Ind-Ra’s base case due to surety on receipt of safeguard duty (SGD) with demonstrated receipt of SGD claims from the counterparty –  MP Power Management Company Limited (MPPMCL) and Delhi Metro Rail Corporation (DMRC), interest rate reduction and the creation of one quarter’s debt service reserve account (DSRA) for the Rewa project. The ratings also factor in the adequate liquidity of about six months in each project.

MRPL’s credit profile has been strengthened by the stable operations of the Rewa project at full capacity for about two years, the continued receipt of timely payments from the off-takers, and the build-up of adequate internal liquidity.  The ratings are underpinned by the strong counterparty profile of the SECI project, moderate-to-strong counterparty profile of MPPMCL and DMRC, the robust three-tier payment security mechanism of Rewa power purchase agreements (PPAs) and stable plant operations.

KEY RATING DRIVERS

Successful Commissioning of SECI Project and Regular Receipt of Payments from SECI: The SECI project commissioned its full contracted alternating current capacity of 250MW on 29 October 2021 in phases (100MW by May 2021, 160MW by June 2021 and 250MW by August 2021), against the approved timeline of 31 May 2021 due to COVID-19-related disruptions and delay in long-term access commissioning approval. SECI is regular in making payments in about 57 days on an average since the project commissioning. The project incurred increased module procurement costs on account of the SGD applicable on imported solar modules, funded by the sponsor. The Central Electricity Regulatory Commission has instructed petitioner to follow the Ministry of Power’s order on this matter (notified in December 2021) and the mechanism of payment is currently being finalised between the off-taker (SECI) and MRPL in the form of lumpsum annuity-based monthly payments. Ind-Ra has considered a conservative view of the same in its projections and including these SGD payments, the projects’ coverage ratios are comfortable providing an additional buffer to the cash flows.

Firm Revenue Profile: The Rewa project has 25-year PPAs with MPPMCL and DMRC, in a ratio of about 76:24 at a levelised tariff of INR3.30/unit and a starting tariff of INR2.979 in the first year. The tariff will be increased annually by INR0.05 for the first 15 years. The project benefits from the payment security mechanisms, namely a letter of credit, a state government guarantee under the MPPMCL PPA, a letter of credit covering the DMRC PPA, and a payment security fund created by Indian Renewable Energy Development Agency Limited (‘IND AA+’/Stable) and RUMSL. The payment security mechanism established in the Rewa project is stronger than other solar projects awarded under reverse bidding.

Ind-Ra takes comfort from the long-term tie-up for the new project with a strong counterparty such as SECI, with a  25-year PPA at a tariff of INR2.53/unit. The PPA stipulates the following: i) maintaining of a minimum amount of power that has to be supplied by the project; ii) guaranteed power offtake by SECI; iii) tariffs in case of excess generation; iv) penalties to be levied in case of lower generation; and v) part commissioning of the project with the power generated being bought at a specified tariff. Ind-Ra takes comfort from firm tie-up of 100% power to be generated from both the projects under MRPL.  

The REWA project is eligible to receive SGD payments from MPPMCL and DMRC as per the  change in law clause in the PPA as per the CERC order. The same will be in the form of annuity to be received over 13 years. MRPL has already received payments from October 2021 till January 2022 from DMRC and for November to December 2021 from MPPMCL. Ind-Ra has considered the impact of the SGD receipt in its cash flows and the projects’ coverage ratios are comfortable with the additional buffer to the cash flows.

Sponsor Undertakings Lends Strength: MRPL is a wholly-owned subsidiary of Mahindra Susten Private Limited (MSPL; ‘IND A+’/Stable/‘IND A1+’), whose parent is Mahindra & Mahindra Limited (‘IND AAA’/Stable). MSPL’s undertaking for supporting any project cost overruns and bridging any shortfall in the creation of the initial DSRA  for the SECI project provides comfort. The sponsor has also undertaken to fund any penalty imposed due to delays in achieving the commercial operation date (COD), and fund the shortfall, if any, till the project achieves the COD. The sponsor has also undertaken to infuse additional funds towards the prepayment of term loans drawn towards the payment of SGD. However, the SGD is likely to be reimbursed by the off-taker under the change in law clause of the PPAs.  The key sponsor undertakings cover the construction-related risks to a large extent, thus supporting the ratings. 

Generation Marginally Below P90 Levels: The generation in the first year (12 months ended January 2022) of operations at full capacity stood at 22.04%, marginally lower than the P90 levels of 22.77%, mainly attributed to lower irradiation months especially during December 2021 to January 2022 for the REWA project. The generation for the last 12 months ended January 2022 was 27.33%, marginally lower than the P90 estimates for the first year of operations for the SECI project, due to lower irradiation. Ind-Ra has assumed a capacity utilisation factor of 22.50% and 27.00% in the base case assumptions for Rewa and SECI projects, respectively, along with an annual degradation to factor in any downside in module performance.

Moderate Debt Structural Features: The SECI project entails a total cost of INR12,000 million, funded by debt of INR9,000 million and equity of INR3,000 million. The debt is repayable in 75 structured quarterly instalments, ending in FY40, leaving a tail period of about six years. A DSRA equivalent to two quarters of debt servicing obligations will be created within 12 months of the COD. The debt structure also has a debt service coverage ratio (DSCR)-linked cash sweep mechanism. The project debt coverages are resilient to downside stress scenarios on generation levels and increase in interest rates.

The debt structure of the Rewa project stipulates a DSRA equivalent to one quarter of debt servicing; the same has already been created post Ind-Ra’s last surveillance. The project also has a DSCR-linked cash sweep mechanism. The debt is repayable in 73 structured quarterly instalments, starting 3QFY20 and ending 3QFY38, indicating a tail period of about seven years. Ind-Ra considers MRPL’s overall debt structure profile to be moderate. 

Liquidity Indicator – Adequate: Both the projects have an average DSCR of above 1.2x, resilient to moderate amounts of stress applied on the generation levels, interest rates and operating expenses, and liquidity equivalent to five-to-six months of debt obligations. While MPPMCL and DMRC have been paying within an average of 30 and 16 days, respectively, during the 12 months ended January 2022, any delay in payments can be mitigated by the strong payment security mechanisms in place as per the two PPAs. As  on 31 January 2022, MRPL had a cash balance of INR405.2 million in the SECI project (equivalent to five months of debt obligations) and INR472.2 million in the REWA project (equivalent to six months of debt obligations).

Improved Financial Performance: The capacity under operations was significantly higher on a year-on-year basis in FY21, resulting in increased revenue and profitability. The company’s revenue from operations rose to INR1,536.95 million (FY20: INR1,060.93 million) and EBITDA margins to 83.96% (74.22%). The company did not have any contingent liability as on 31 March 2021.

Limited Operation Risk: The plant’s operation will be carried out by an in-house team. An operations and maintenance (O&M) contract for the Rewa project has been signed with Mahindra Teqo Private Limited. Ind-Ra takes comfort from the group’s extensive experience of operating solar projects, limited technological complexities involved in the O&M of solar projects, and the project being part of a large solar park with integrated facilities. 

Moderate Supply and Technology Risks: The Rewa and SECI projects employ solar photovoltaic modules from several established suppliers. A combination of poly-crystalline, mono-crystalline and bifacial technologies have been used in the projects. Ind-Ra derives comfort from the fact that the Rewa project has been operational for about two years.

RATING SENSITIVITIES

Positive: A significant improvement in the operating performance with PLF generations more than P75 estimates and coverages exceeding Ind-Ra’s base case estimates on a sustained basis can result in a rating upgrade.

Negative: The following factors, individually or collectively, will  lead to a  negative rating action:
– forward-looking average DSCR below 1.2x on a sustained basis for either of the projects.
– elongation in the receivable period from the off-takers beyond 90 days for either Rewa or SECI projects for an elongated period of time, resulting in a significant decline in internal liquidity,
– significant depletion in internal liquidity,
– lower-than P90 generation levels for an extended period of time,
– higher-than-anticipated O&M expenditures,
– deterioration in the counterparty/sponsor’s credit profile.

COMPANY PROFILE

MRPL (a 100% subsidiary of MSPL) owns Unit 1, comprising a 250MW_AC capacity solar photovoltaic power project, at RUMSL’s solar park in Rewa district, Madhya Pradesh. It is one of the three units of 250MW each in RUMSL’s solar park, which are being developed by three successful bidders. MRPL also owns an under construction 250MW solar power project at Bhivji ka gaon, Tehsil Baap, Jodhpur, Rajasthan. In addition, MRPL is the holding company of three other entities namely Bright Solar Renewable Energy Private Limited (100% stake), Neo Solren Private Limited (100% stake) and Astra Solren Private Limited (100% stake).

FINANCIAL SUMMARY

RATING HISTORY

ANNEXURE

Financial Covenants

The covenants delineated in the project documents are as follows:

BANK WISE FACILITIES DETAILS

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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India’s most respected credit rating agency committed to providing India’s credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India’s fixed income market.

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Source : indiaratings