Fitch Assigns ReNew Power Restricted Group 4’s Proposed Notes ‘BB-(EXP)’
Fitch Ratings has assigned India-based ReNew Power Restricted Group 4’s (ReNew RG4) proposed US dollar senior secured notes due 2028 an expected rating of ‘BB-(EXP)’.
The Outlook is Positive. ReNew RG4 is a restricted group that includes 10 subsidiaries of ReNew Power Private Limited (ReNew Power, BB-/Positive).
ReNew Power is one of the largest renewable-energy independent power producers in India with total operating capacity of 5.4GW and under-construction capacity of 4.5GW.
The final rating is contingent upon the receipt by Fitch of final documents conforming to information already received. RATING RATIONALE The rating on the proposed notes reflects the credit strengths and weaknesses of the restricted group of operating entities.
The restricted group will benefit from the parent’s access to funding for refinancing its USD bond supported by a full-tenor guarantee from ReNew Power. The restricted group includes 10 renewable projects with a total capacity of 803.1MW spread across seven states in India.
The portfolio has nine wind assets (753.1MW) and one solar project (50MW). All of the assets have been operating for more than three years, other than one 300MW wind project, which started operations in February 2021.
The 300MW project is contracted with sovereign-owned Solar Energy Corporation of India (SECI) while rest are contracted with weak state-owned distribution companies. KEY RATING DRIVERS Proven Technology, Lack of Maintenance Reserve – Operation Risk: Midrange The technologies deployed in ReNew RG4’s wind and solar projects are considered proven.
Most of the wind turbines are procured from some of the world’s largest manufacturers while the solar modules are sourced from an internationally well-known supplier.
Operation and maintenance (O&M) for most of the wind projects is carried out by the original equipment manufacturers under 10-year contracts. The O&M for two wind projects – 28MW and 92MW – was taken over by an affiliate company, ReNew Services Private Limited, in early 2020 at a fixed price, with 4%-5% annual price escalation, for shorter but extendable tenors.
The O&M for the solar project is also carried out by the affiliate company under a five-year fixed-price contract, with 5% annual price escalation. The operation risk assessment is constrained at ‘Midrange’ as the operating cost forecast is not validated by an independent technical advisor and the bond indenture does not have a maintenance reserve account.
Wide Forecast Spread, Adequate Operating Performance – Revenue Risk (Volume): Weaker The energy yield forecast produced by third-party experts indicates an overall P50/one-year P90 spread of 18%, leading to a ‘Weaker’ assessment for volume risk. The portfolio has a capacity-weighted average record of three years as all assets have been operating for more than three years, except the recently commissioned 300MW wind project.
The actual load factors recorded by the portfolio in FY19-FY20 (financial year ends March) were moderately volatile. Hence, we apply a lower haircut of 7% on the volume forecast in our base and rating cases.
The curtailment risk is limited in India due to the “must-run” status of renewable projects. Fixed Long-Term Prices, Minimal Renewal Risk – Revenue Risk (Price): Midrange ReNew RG4 contracts 63% of its total capacity with state-owned distribution companies and the balance with SECI under long-term fixed-price power-purchase agreements (PPA), which largely protect the portfolio from merchant price volatility. These PPAs have a capacity-weighted residual life of about 22 years.
The only contract with a shorter fixed-price tenor of 13 years, with a remaining life of five years, is a 28MW wind project signed with Maharashtra’s state-owned distribution company. However, Fitch expects management to recontract the asset on the expiry of its current PPA given the residual asset life of about 12 years at the end of the tenor.
We constrain the price risk assessment at ‘Midrange’ in light of the low but certain merchant price exposure due to this asset. Ring-Fenced Structure, Manageable Refinance Risk – Debt Structure: Midrange Noteholders are protected by ReNew RG4’s ring-fenced structure and covenants. Noteholders benefit from a standard cash distribution waterfall and a lock-up test at a backward-looking 1.3x interest-service coverage ratio for cash outflow.
The notes pay a fixed interest rate and we expect ReNew RG4 to substantially hedge currency risk. The restricted group will not maintain a debt-service reserve account or a major maintenance reserve account, but this is in part balanced by the excess cash required to be retained within the restricted group in the last year of the life of the notes.
Refinancing risk is mitigated by the parent’s guarantee and access to banks and capital markets, with support from the balance tenor of the PPAs, which extend beyond the maturity of the notes. PEER GROUP ReNew RG4’s closest peer is ReNew Power Private Limited Restricted Group 3 (ReNew RG3, US dollar notes: BB-/Stable).
The credit assessment of both restricted groups is supported by that of their parent, ReNew Power. ReNew RG3 has similar wind/solar mix of 67%/33%. However, its counterparty mix is a tad weaker with 77% of its capacity exposed to weak state-owned distribution companies and the balance signed up with commercial and industrial customers, against 37% of ReNew RG4’s capacity that is contracted with SECI.
ReNew RG4’s financial profile marginally benefits from the benign interest rate environment while ReNew RG3’s financial profile gets an uplift from committed interest income from the parent on inter-company loans extended by the restricted group.
RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: – An upgrade of the parent guarantor Factors that could, individually or collectively, lead to negative rating action/downgrade: – A downgrade of the parent guarantor 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.
The proposed US dollar bonds will be co-issued by the 10 operating entities. The due and punctual payment of all amounts payable by each co-issuer under the US dollar notes will be fully and unconditionally guaranteed on a senior basis by each of the other co-issuers, and fully guaranteed on a senior basis by ReNew Power.
The co-issuers will use the proceeds to repay their existing debt, make payments to capital creditors, and fund prepayment transaction expenses and prepayment penalties.
The residual amounts (if any) would be on lent to the parent guarantor. CREDIT UPDATE Not applicable FINANCIAL ANALYSIS About 19% of the restricted group’s capacity is contracted with weak state-owned distribution companies in Andhra Pradesh and Telangana. The higher receivable days put pressure on the restricted group’s cash flows.
We assume associated receivable days will increase further by FYE21 before falling in FYE23. We do not expect attempts by the Andhra Pradesh government to renegotiate tariffs in its PPAs to be successful. Any tariff revision will be treated as event risk in our credit assessment of the restricted group’s bonds.
Fitch’s forecast assumes 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.
Fitch’s base case assumes P50 generation, a 7% production haircut and an 11% refinancing interest rate, which result in an average annual debt-service coverage ratio (DSCR) of 2.00x, 1.46x and 1.30x over the bond life, portfolio life and refinancing period, respectively. Fitch’s rating case assumes one-year P90 generation and a 7% production haircut.
We also apply a 15% stress on management’s operating expense forecast and an 11% refinancing interest rate.
Our rating case results in an average annual DSCR of 1.63x, 1.17x and 1.0x over the bond life, portfolio life and refinancing period, respectively. The restricted group will benefit from the parent’s access to funding for refinancing its US dollar bond supported by a full-tenor guarantee from ReNew Power.
SECURITY The US dollar bonds issued by each co-issuer benefit from a standard security package, including a charge over certain immobile and movable assets of the co-issuer, and a share pledge over a 51% stake in the operating entity.
Criteria Variation Fitch has based the rating on the proposed notes on the indicative DSCR thresholds applicable to merchant projects, for assets contracted with state-owned distribution companies, 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 29 March 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 rating of ReNew RG4’s bonds is 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.
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