Greenko Energy Holdings’ (GEH, B+/Stable) credit profile is not affected by its acquisition of SunEdison’s India portfolio, Fitch Ratings says. The agency expects GEH’s leverage to increase temporarily at the end of the financial year to March 2017 (FY17), before improving from FY18 as the acquired assets chalk up a full year of operations.
GEH announced on 30 September 2016 that it will acquire about 390MW of SunEdison’s solar and wind power generation assets in India that are operational or close to coming on line. The acquisition has an enterprise value of USD392m, which GEH will meet by making a cash payment of USD42m and assuming project-level debt of USD350m (at an 11.3% of average interest cost). As a part of the transaction agreement, GEH will take over SunEdison’s pipeline of solar generation projects in India at no additional cost. These projects in the pipeline have total capacity of 653MW. About 83% of the total capacity that GEH will acquire is in its current regions of operations – Andhra Pradesh, Telangana and Karnataka – while the rest is mainly in Tamil Nadu. This may provide certain operational synergies if this solar capacity is combined with its largely wind-based generation portfolio in these regions.
The assets that are operational or close-to-operational include 343MW of solar power generation assets – marking GEH’s entry into India’s solar market. About 249MW of this solar power capacity started operations in FY16 and another 52MW (48MW wind and 4MW solar) started over May-July 2016. GEH expects the balance 90MW of solar power plants to start operations over October-November 2016. Most of these projects benefit from power purchase agreements with 20-25 year terms and tariffs ranging from INR5.10/kWh to INR7.01/kWh for the solar projects, which Fitch views as attractive, relative to tariffs for projects that have been offered recently in India.
GEH may eventually allocate the acquired assets to its two restricted groups that were created to raise US dollar debt in the capital markets – Greenko Dutch BV (USD550m 8% senior notes due 2019 rated ‘B+’; capacity of 623MW) and Greenko Investment Company (USD500m 4.875% senior notes due 2023 rated ‘B+’; capacity of 403MW). However, this will be subject to terms and conditions in the bond indentures, including debt to EBITDA incurrence tests. GEH may be able to reduce the interest costs of the debt assumed via a future refinancing exercise. Nevertheless, Fitch expects the newly acquired assets to be able to service their debt obligations with their own cash generation, so they will not put pressure on the GEH group’s liquidity.
Fitch expects GEH’s financial performance to benefit from improved operating conditions as the effect of El Nino on wind patterns and monsoon subsides, the full-year contribution from existing assets and from commencement of operations of assets currently under construction.
The new 390MW generation portfolio is forecast to generate a steady state EBITDA of about USD75m a year from FY18 (FY17: USD37m), according to the management, placing the debt/EBITDA of the transaction slightly under 5x. Fitch expects GEH’s consolidated financial leverage, as measured by debt to EBITDA, to remain around 5x in the medium term. We expect GEH to take a conservative approach in relation to the development of the 653MW of pipeline projects, only pursuing projects that are economically sound. Fitch had included in its assumptions about 900MW of capacity additions by GEH through FY22; the acquired pipeline can support part of this growth target, in our view. We also believe GEH will seek to raise funds via equity issues if it seeks a higher growth target after this transaction.