Fitch Ratings has affirmed ReNew RG II’s USD525 million senior secured notes due 2024 at ‘BB’.
ReNew RG II is a restricted group of subsidiaries owned by ReNew Power Private Limited (ReNew; BB-/Stable). The rating on the notes reflects the credit profile of the restricted group (RG) of eight entities that have an operating capacity of 636MW in solar (56% of total capacity) and wind (44%) power generation in India.
The US dollar notes represent joint and several obligations of the eight operating entities. The rating benefits from restrictions on cash outflow and additional indebtedness of the RG and reflects ReNew RG II’s diversified portfolio of operating solar and wind power assets and an improving financial profile.
Key Rating Drivers Strong Structural Enhancements: The notes are issued directly by the asset-owning entities and the structure includes a static pool of fully operational assets with no additional debt permitted except for working capital. The notes are secured by a pledge of at least 51% equity share in each of the operating entities and substantially all of the assets. The structure also includes a six-month interest service reserve account (ISRA) and restrictions on cash outflows via a minimum debt-service coverage ratio (DSCR) of 1.3x. The notes benefit from interest income on advances extended to the parent.
Operating Performance Within Expectations: ReNew RG II’s wind-based generation suffered from a weaker wind season in the first half of the financial year ending March 2021 (1HFY21), but Fitch expects overall performance for FY21 to be in line with our forecasts, which we reduced due to the Covid-19 pandemic. While we expect the plant load factor in FY21 to fall slightly to 20.6% (FY20: 21.0%), we expect EBITDA to rise by 6%, driven by increasing contribution from more stable solar assets that form the majority of ReNew RG II’s capacity, have higher average tariffs and lower operating costs.
Financial Profile to Improve: Fitch expects ReNew RG II’s financial profile to improve, supported by positive cash flows from operations and restrictions on additional indebtedness. We expect the RG’s EBITDA net interest coverage to improve to 2.3x by FYE24 (FYE21: 1.9x) and net leverage (net debt/ operating EBITDA) to fall below 4x by FYE24 from around 5.5x at FYE21.
Our financial profile assessment incorporates ReNew’s commitment to not use the balance in the ISRA for coupon payments and maintain sufficient liquidity within the RG, including retaining all cash generated after meeting debt obligations during the two years before the maturity of the US dollar notes. It also factors in wind-based generation reverting to normal levels after the decline in FY21 and our expectation of improvement in receivable days.
Weak Counterparty Profile: The rating on the notes reflects the weak credit profiles of the RG’s key counterparties – state-owned power distribution utilities – which account for about 75% of ReNew RG II’s offtake. The rest of the offtake is sold directly to corporate customers. The weak financial profile of the state-owned distribution companies and the off-take concentration in Rajasthan (25% of total off-take) and Telangana (22%), where the distribution companies have delayed payments, led to an increase in ReNew RG II’s receivable days to 217 by FYE20 (FYE19: 164 days). We expect receivables for the RG to fall to around 163 days in FY22 as the disbursements from the Indian government’s INR1.2 trillion liquidity support package gathers pace.
The RG does not sell power to distribution utilities in Andhra Pradesh state, which has tried to renegotiate power-purchase agreements (PPAs) and delayed payments by more than a year. As a result, ReNew RG II has lower receivable days than peers exposed to utilities in Andhra Pradesh. Price Certainty, Volume Risks: We believe the long-term PPAs for all of the RG’s assets offer price certainty and long-term cash flow visibility. The assets have an average PPA life of more than 15 years. PPAs with state-owned distribution companies have life of 13-25 years and account for nearly 75% of ReNew RG II’s capacity. The remainder is contracted to corporate customers for shorter periods of 8-10 years. Production volumes, however, will vary based on resource availability, which is affected by seasonal and climatic patterns.
Forex Hedging, Some Refinancing Risk: The RG’s earnings are in rupees, but the notes are in US dollars, resulting in exposure to foreign-exchange risk. ReNew has hedged the foreign-exchange risk of the majority of the principal and semi-annual coupon payments of its US dollar notes. The notes face refinancing risk as the cash balance at the RG is not likely to be sufficient to repay the notes at maturity. This risk is mitigated by the long remaining life of the PPAs for the RG’s assets and ReNew’s strong access to banks and capital markets. Derivation Summary Greenko Energy Holdings’ (BB/Stable) credit profile benefits from a larger more diversified portfolio than ReNew RG II, with a total capacity of 5.1GW of operational capacity, spread across wind (62% of capacity), solar (27%) and hydro (11%). Greenko’s rating also benefits from its solid financial access. Greenko’s shareholders contributed equity, as well as introduced stronger risk-management practices, including a commitment to deleveraging. In comparison, ReNew RG II has a higher proportion of solar assets, which are more stable compared with wind and hydro. This, together with no execution risks, a tighter transaction structure and better credit metrics over the life of ReNew RG II’s notes, leads to a similar overall ‘BB’ assessment to Greenko. Concord New Energy Group Limited (CNE, BB-/Negative) has an attributable wind capacity of 2,277MW across multiple projects in China.
CNE’s feed-in tariffs are stable and its counterparty risk is significantly lower than that of ReNew RG II, as its revenue stream is mostly reliant on State Grid Corporation of China (A+/Stable) and China’s Renewable Energy Subsidy Fund. In comparison, the majority of ReNew RG II’s portfolio is solar-based, while it faces no execution risks and has a lower expected leverage. In our view, ReNew RG II’s credit profile is at least a notch better than that of CNE. ReNew RG II’s stronger financial profile, driven by our expectations of stronger credit metrics and more stringent restrictions on additional indebtedness, leads to its rating being one notch higher than that of Azure Power Energy Ltd. (US dollar notes: BB-) despite the latter’s fully solar asset portfolio and stronger counterparties for nearly one-third of its capacity.
ReNew RG II has a higher proportion of more-stable solar assets than Neerg Energy Ltd.
(US dollar notes: BB-). This, together with restrictions on additional indebtedness and better interest coverage of above 2x than 1.7x for Neerg, results in the US-dollar notes of ReNew RG II being rated two notches above the ‘b+’ standalone credit assessment of the Neerg Energy RG. Key Assumptions Fitch’s Key Assumptions Within
Our Rating Case for the Issuer: – Plant load factors ranging from 19% to 29% for all assets – Plant-wise tariffs in accordance with respective PPAs – EBITDA margins to range from 80% to 90% for all assets over the medium term – Average receivable days to improve to around 165 by FY22 (FY20: 217 days; FY21: 203 days ) – ReNew to pay coupon of 8% per annum to the RG on USD120 million of cash lent to the parent – Sufficient cash for operations to be maintained in the RG over and above the required six-month ISRA – No cash outflow to parent assumed in the fourth and fifth years (FY23 and FY24) of the bond tenor even if DSCR of 1.3x is satisfied to preserve cash for the bond refinancing RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: – Positive rating action is unlikely over the medium term as the rating reflects anticipated improvement in credit metrics.
The business profile is not expected to change either due to the restricted nature of the pool. Factors that could, individually or collectively, lead to negative rating action/downgrade: – Failure to reduce net leverage, measured by net debt/ operating EBITDA, to below 4.0x by FY24 – Operating EBITDA/net interest of below 2.0x on a sustained basis, or failure to improve it towards 2.3x by FY24. – Significant, sustained deterioration of the RG’s receivable position – Significant increase in refinancing risk, including that caused by major weakening of the parent’s credit profile. – Failure to adequately mitigate foreign-exchange risk Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate 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 four 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. Liquidity and Debt Structure Sound Liquidity: ReNew RG II’s US dollar notes that mature in March 2024 are the only external debt in the RG. In addition, we expect the RG’s free cash flow to be positive. Management plans to pass on the cash flows generated by ReNew RG II to the parent as interest on related-party loans, repayment of related-party loans or inter-company loans subject to the covenants of the notes – mainly DSCR of more than 1.3x and cash trap requirements.
We also expect the RG to maintain minimum cash of about USD30 million, which is over and above the ISRA and cash trap requirements. 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 ReNew RG II —-senior secured; Long Term Rating; Affirmed; BB Contacts: Primary Rating Analyst Girish Madan, Director +65 6796 7211 Fitch Ratings Singapore Pte Ltd.
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