S&P Global Ratings said that it had affirmed its ‘B+’ long-term corporate credit rating on Greenko Energy Holdings, which owns and operates India-based renewable power projects. The outlook is positive. We also affirmed our ‘B+’ long-term issue ratings on U.S.-dollar-denominated senior secured notes that Greenko Dutch B.V. issued. Greenko guarantees the notes. At the same time, we assigned our ‘B+’ long-term issue rating to U.S.-dollar-denominated senior secured loans that Greenko Investment II Ltd. proposes to issue. Greenko will guarantee these notes too. The issue rating is subject to our review of the issuance documentation.
“We affirmed the rating with positive outlook because we believe Greenko, under its majority shareholder GIC Pte Ltd., remains committed to deleveraging,” said S&P Global Ratings credit analyst Abhishek Dangra. GIC, along with Abu Dhabi Investment Authority (AIDA), has infused US$230 million into Greenko, which will help reduce the company’s currently high leverage (ratio of debt to EBITDA) and fund future growth. We also expect Greenko’s earnings to increase owing to favorable weather patterns and significant new capacity additions. We expect the company’s ratio of debt to EBITDA to reduce to about 5x in the fiscal 2018 (year ending March 31, 2018), from more than 7x in fiscal 2017. We expect Greenko’s board (led by GIC) to adjust the company’s growth capital expenditure (capex) or funding mix to prevent any sustained increase in leverage above 5x in case of under-performance.
We believe GIC will continue to drive Greenko’s financial policies and risk management practices. GIC has adopted a strict hedging policy (100% hedging on foreign currency debt) and Greenko has a strong independent board of directors. GIC considers Greenko as an important investment. Greenko is GIC’s first and sole direct corporate investment in which it has a majority stake and board control. However, Greenko is a relatively small investment for GIC and is one of many investments in the sovereign wealth fund’s large portfolio. Greenko remains a small player in the large and fragmented Indian power industry. The weak credit quality of some of its customers–the state electricity boards in India could affect timely recovery of payments and constrain the company’s cash flows. In addition, Greenko is exposed to variability in wind patterns because it generates almost 70% of its cash flows in the wind business between April and September.
The stable and regulated nature of Greenko’s business allows cost pass through, fixed tariffs, and priority offtake on grids. The regulated business is likely to account for the majority of the company’s revenues, but wind projects are suspect to weather patterns. Greenko also benefits from its long-term offtake agreements with its customers. The government’s thrust on supporting green energy should also support growth and offtake on grids, despite the relatively high although reducing cost of renewable energy. We expect Greenko to maintain and build on its successful track record of capacity additions. “The positive outlook reflects our expectation that Greenko will continue to deleverage over the next 12-18 months, backed by its improving operating performance and GIC’s financial policies,” said Dangra. “We also expect new capacity additions to help Greenko maintain EBITDA interest coverage of above 1.5x in 2017 and more than 2x thereafter.”
We may revise the outlook to stable if we believe Greenko’s leverage is unlikely to reduce below 5x or EBITDA interest coverage does not improve sustainably above 2x over the next 12-18 months. This can happen due to Greenko’s: high debt-funded capex; delays in project execution or investor returns; or weakening operational efficiency because of lower plant load factor. We may raise the rating if we believe Greenko will reduce leverage, such that the debt-to-EBITDA ratio is sustainably below 5x or EBITDA interest coverage is substantially above 2x. This can happen if: Greenko’s operating performance is strong, supported by disciplined execution of new capacity additions and favorable weather patterns; and the Greenko board (led by GIC) appropriately adjusts the company’s capital structure or capex to ensure leverage remains within the above tolerance levels.