India Ratings Assigns Parampujya Solar Energy’s Proposed Term Loan ‘Provisional IND AA (SO)’/Stable
India Ratings and Research (Ind-Ra) has rated Parampujya Solar Energy Private Limited’s (PSEPL) proposed senior rupee term loan as follows:
|Instrument Type||Date of Issuance||Coupon Rate (%)||Maturity Date||Size of Issue (million)||Rating/Outlook||Rating Action|
|Proposed senior rupee term loan*||–||–||–||INR5,170||Provisional IND AA(SO)/Stable||Assigned|
* The final rating is contingent upon the receipt of the final documents, including escrow agreements, inter-creditor agreement, continuing covenant deed and project account deed, conforming to information already received by Ind-Ra.
Analytical Approach: The rating is based on an analysis of the proposed debt facilities totalling INR11,000 million that will be borrowed collectively by PSEPL, Prayatna Developers Private Limited and Adani Green Energy (UP) Limited, which have been referred to as the restricted group 1 (RG1). Cross guarantees between the three participants, presence of a cross default clause and consolidated covenant testing bind the RG1 to meet debt servicing obligations.
Therefore, Ind-Ra has considered consolidated cash flow to arrive at the rating. Additionally, the obligor and co-obligor structure lists the mechanism for money transfer to co-obligors in the event of insufficient funds in their respective trust and retention accounts. Therefore, the rating of the RG1 is assigned to the individual special purpose vehicle’s, PSEPL, INR5,170 million debt, which is a part of the total debt limit of the RG1.
The rating reflects the strong credit profile of the RG1, which have an operating capacity of 930MW in India. The strong credit profiles of counterparties such as NTPC Limited (‘IND AAA’/Stable/‘IND A1+’) and Solar Energy Corporation of India (SECI) could ease the liquidity stress of the RG1, if there are any payment delays from the state discoms of Punjab, Karnataka and Uttar Pradesh. The RG1 plans to use the proceeds (about INR46,000 million) from the proposed USD notes (USD500 million) and the proposed rupee term loan (INR11,000 million) to mainly refinance existing senior and subordinated debt at operating entities under the RG1 and to fund any additional capex requirements.
KEY RATING DRIVERS
Pooled Structure Diversifies Cash Flows: The rating factors in the diversified cash flows from 25 different projects of the RG1, along with the obligor and co-obligor structure. Under the structure, each borrower has the advantage of a cross guarantee made by the other two co-borrowers to pay the total debt. Ind-Ra has relied on the draft terms of the loan agreement provided by PSEPL. Further, the security to the USD notes is shared on a pari passu basis with the Indian rupee lenders at the operating entities.
Wardha Solar (Maharashtra) Private Limited, a wholly owned subsidiary of PSEPL, will not have any link with the RG1.There is no cross default between Wardha Solar (Maharashtra) and the RG1. RG1 covenants limit the acquisition of any further debt obligations and contingent liabilities through guarantees/undertakings. Therefore, the participants are restrained from providing any guarantees/undertakings outside the RG1.
Fully Contracted Capacity Mitigates Revenue Risks: The entire portfolio of the RGI of 930MW, is tied to a 25-year power purchase agreement with NTPC (36.6%), Karnataka discoms (26.9%), SECI (20.4%), Punjab State Power Corporation Limited (10.8%) and Uttar Pradesh Power Corporation Limited (5.4%) at a fixed weighted average tariff of INR4.83/kWh. The ratings draw strength from the strong credit profiles of the counterparties and the must-run status awarded to the renewable projects in the portfolio.
The entire portfolio is operational for more than 18 months, barring 50MW in Uttar Pradesh, which received the commissioning certificate from Uttar Pradesh Power Corporation Limited in May 2019.
Generation Better than P90 Estimate: The projects under the RG1 across Chhattisgarh, Karnataka, Andhra Pradesh, Telangana, Punjab, Rajasthan, and Maharashtra have been operating for over 18 months. The projects of Prayatna Developers have an average operational track record of 24 months and performed at a higher plant loan factor (PLF) of 23.05% in FY19 than the corresponding 21.76% P75 estimate. The projects of PSEPL reported a PLF of 24.42% for FY19 against a P90 PLF of 22.5%. Meanwhile, the projects of Adani Green Energy (UP) have an average operational track record of 12 months and performed at a PLF of 20.74% in FY19 against a P90 PLF of 23.5%. Adani Green Energy (UP)’sprojects are in a stabilisation phase and registered an improved PLF of 25.04% for 4QFY19. Ind-Ra expects the consolidated portfolio to perform better than the P90 estimate in the long term.
Robust Investor Protection Features Provide Structural Comfort: The RG1’s credit profile is supported by the structural features of the proposed rupee term loans and the proposed USD notes, along with the provision of a debt service reserve equivalent to ensuing six months of debt service obligations. Furthermore, any cash outflows from the RG1 towards distribution to subordinated debtholders, dividend payments and others are subject to the meeting of the restrictive covenants at the consolidated level. The proposed refinancing exercise benefits from the extended amortisation schedule. The testing of multiple covenants during various intervals ensures the trapping of cash to address the refinancing risk and the maintenance of adequate liquidity to meet debt service obligations.
Similarly, the debt service coverage ratio (DSCR)-linked covenants are aimed at addressing any stress due to a generation shortfall. The subordinated debt extended by the sponsor, Adani Green Energy Limited (AGEL; ‘IND A’/Stable), has been not been considered for the DSCR calculation as the debt is defined as an equity instrument in the draft of the common loan agreement, with no rights to call an event of default and cannot accelerate payments. Also, funds extended by any borrower to another co-borrower for any purpose would be subordinated to the senior debt with no priority rights on cash flows and no rights to call an event of default.
The lender protection features include the following:
– Upfront creation of the DSRA
– Cash sweep, if the project lifecycle coverage ratio (PLCR) is less than 1.6x and subsists until the PLCR on two consecutive years is greater than 1.6x
– Undertaking from AGEL to maintain a minimum pool DSCR of 1.1x
|Covenant||Testing||Cash Trap in Event of Failure||Permitted Distribution|
|Minimum DSCR||1.1x||Event of default||–|
|PLCR||1.6x||On any calculation date, If PLCR is lower than 1.6x, then 100% cash is trapped and transferred to Senior debt redemption account. If PLCR exceeds 1.6x for the next two calculation dates, the cash trap over and above required for debt sizing will be released to operating account.||If the PLCR is more than 1.6x then no cash is trapped.|
|FFO/net debt||6%||25% of residual cash flow as per operating waterfall||75% of total distribution available, if FFO/net debt is less than 6% and will persist until FFO/net debt exceeds 6%|
|DSCR (lock-up senior debt)||1.55x||40% of residual cash flow transferred to Senior debt restricted reserve account||60% of residual cash flow; remaining 40% moved to the senior debt restricted reserve account until the pool DSCR exceeds 1.55x in consecutive years|
|DSCR (lock-up equity)||1.45x||50% of residual cash flow as per waterfall||Subordinated debt payments and shareholder distribution restricted to 50% of the total distribution available|
|DSCR (lock-up sub-debt)||1.35x||100% of residual cash flow as per waterfall||No permitted distribution|
Prescribed Waterfall Mechanism: An independent trustee will monitor the proposed escrow account and the reserves on which there will be a lien. The trustee will monitor appropriations, including debt service payments, which will be governed by the following prescribed operating waterfall mechanism for the SPVs:
– Statutory dues
– Operating expenses and payments
– Debt payment
– Mandatory repayment/prepayment and hedge termination/cross-currency swap payments
– Senior debt restricted reserve account
– Capex reserve account
– Third-party subordinated payments and defaulting hedge amounts
– Subordinated DSRA
– Voluntary prepayment of senior debt
– Distribution account
Strong Coverage Ratio to Address Refinancing Risk: The proposed USD bonds feature a bullet repayment, indicating the refinancing risk. The risk is addressed through the PLCR-linked triggers. Ind-Ra has applied a synthetic amortisation for the bullet repayment and expects the RG1 to refinance the facility well ahead. The proposed repayment structure of the USD notes indicates the submission of a refinance plan a year ahead of maturity. Therefore, any elevated risk posed by project underperformance and increased operating expenditure could impact the refinancing and would be a key rating sensitivity. The full amortisation of the rupee debt over the life of the proposed USD notes, along with AGEL’s strong access to funding in banking and capital markets, partly addresses the refinancing risk.
Strong Sponsor Profile: AGEL has commissioned several capacities in the past within the scheduled completion time. It has a 4,560 MW renewable energy portfolio (2,020 MW operational capacity and 2,540 MW under construction capacity) across Gujarat (1785MW), Karnataka (810MW), Rajasthan (660MW), Tamil Nadu (648MW), Uttar Pradesh (275 MW), Punjab (100MW), Telangana (100MW), Chhattisgarh (100MW), , Andhra Pradesh (50MW), Maharashtra (20MW) and Madhya Pradesh (12MW).
Minimum PLF Risk: The power purchase agreement stipulates the achievement of a minimum PLF, the failure of which would lead to a penalty payment by the RGI. The penalty is a minimum 25% of the agreement tariff for NTPC and SECI projects or the cost demanded by states for non-compliance with the renewable purchase obligation. At the same time, excess generation could be procured from the RG1 at a tariff of INR3/kWh. In addition, the agreement stipulates a minimum PLF for every quarter. The absence of the minimum PLF could lead to penalties, provided the absence is attributable to the developer.
To arrest the anticipated annual degradation of 0.7%, an incremental capacity of 6.5MW (0.7MW capacity addition for every100MW operational capacity) will be added every year from FY20. Towards this end, Ind-Ra has considered a capex of INR35 million/MW for the proposed addition. Considering the combined availability of tracker, incremental capex and higher DC:AC gearing of 1.3x in most projects, the minimum PLF is plausible to achieve as per the management.
Low Operating Risk: An in-house team handles the operations and maintenance of the projects. The three entities have demonstrated the requisite ability to operate plants at optimum generation levels within the estimated operating cost.
Moderate Technology Risk: The projects use polysilicon solar panels, which have exhibited high reliability and stable performance through the years. The modules are procured from Canadian Solar Inc., Jinko Solar Holding Co., Ltd, Hanwha Q CELLS Technology Co., Ltd and Mundra Solar PV Limited (belonging to the Adani group itself) depending on project category. An independent solar resource study indicates a varied P90 PLF for the projects depending on site location. The thin difference between the P90 and P75 estimates indicates the surety of power generation over the operating period.
Forex Risk/Hedging Risk for USD Bonds: The RG1’s earnings will be in the Indian rupee, though the proposed notes will be denominated in the US dollar. Thus, the RG1 faces the foreign exchange risk. The RG1 has proposed to at least hedge 95% of the entire US dollar bond repayment, and 75% of annual coupon payments, until the maturity date. Although cash flows are resilient to the depreciation in the Indian rupees against the US dollar to some extent, Ind-Ra would monitor the negative impact of highly adverse currency movements, if the US dollar bond coupon payments remain unhedged or partially unhedged.
Negative: Developments that may, individually or collectively, lead to a negative rating action are as follows:
– Lower tariff realisation than contracted price or any communication from the counterparties about the power purchase agreement termination
– Inordinate delay in the receipt of revenue and PLF underperformance
– Failure to adequately mitigate the foreign exchange risk
– Any deviation from the envisaged pooled structure that affects the credit profile of the RG1
Positive: Sustained plant performance exceeding Ind-Ra’s base case estimates could result in a positive rating action.
PSEPL, which holds Wardha Solar (Maharashtra), has operational 420MW capacity across Karnataka (200MW), Telangana (100MW), Chhattisgarh (100MW) and Maharashtra (20MW).
|Particulars (INR million)||1HFY19||FY18|
|Total revenue (including other income)||2,285.66||635.36|
|Cash and cash equivalents||360.19||389.79|
|Instrument Type||Current Rating/Outlook||Historical Rating/Outlook|
|Rating Type||Rated Limits (million)||Rating||4 January 2019||9 November 2017|
|Proposed senior rupee term loan||Long-term||INR 5,170||Provisional IND AA(SO)/Stable||–||–|
|Bank loans||Long-term||INR16,505||IND AA-/Stable||IND AA-/Stable||IND A-/Stable|
|Fund-based facilities||Long-term||INR475||IND AA-/Stable||IND AA-/Stable||IND A-/Stable|
|Loan equivalent risk||Long-term||INR1,640||IND AA-/Stable||IND AA-/Stable||IND A-/Stable|
COMPLEXITY LEVEL OF INSTRUMENTS
For details on the complexity level of the instrument, please visit https://www.indiaratings.co.in/complexity-indicators.
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.
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