India Ratings Reassigns and Downgrades Talettutayi Solar Projects One’s Term Loan to ‘IND A-’; Outlook Negative – EQ Mag
India Ratings and Research (Ind-Ra) has taken the following rating actions on Talettutayi Solar Projects One Private Limited’s (TT1) bank facilities:
#In line with the Reserve Bank of India’s guidance note to credit rating agencies dated 22 April 2022 for bank loan- credit enhanced ratings, Ind-Ra has not assigned credit enhanced ratings to the bank loans availed by TT1 under the obligor-co-obligor structure. The unsupported rating is no longer required to be disclosed.
*INR1,639.1 million outstanding as on 30 November 2022
Analytical Approach: Ind-Ra had previously adopted a residual cash flow approach for rating the debt facilities of TT1 and Talettutayi Solar Projects Two Private Limited (TT2), under the obligor and co-obligor structure. However, owing to the guidance note and the stipulations thereof by the Reserve Bank of India related to credit enhancement (CE) ratings to bank loan ratings under obligor co-obligor structures, Ind-Ra has revised its approach while rating the bank loan facilities of obligor co-obligor structures. The rating has been reassigned owing to a change in the approach and the CE suffix has been removed. Furthermore, Ind-Ra has factored in the cross-guarantee document executed subsequently in January 2023 between TT1 and TT2 in line with the Reserve Bank of India circular. As per the revised approach, Ind-Ra has arrived at the final rating of the debt instrument factoring in the consolidated credit profile of TT1 and TT2 considering the strong legal linkages on account of presence of a cross guarantees between the two SPVs. The debt of TT2 is rated at ‘IND A-’/Negative. The downgrade reflects a sustained underperformance in TT2’s plant load factor (PLF).
The financing document also specifies a cross-default between TT1 and TT2, along with the support mechanism defined in the trust & retention account (TRA) agreement. In the event of an insufficiency of funds/a shortfall in debt servicing by any of these entities, the lenders can utilise the cash in the surplus account of the other entity to set-off such shortfall. The extent of the support will depend on the surplus funds available with the entity after meeting its own debt obligations and in accordance with the priority of cash flow waterfall structures as per the TRA.
The projects have compulsorily convertible debentures of INR330 million and INR66.2 million in TT1 and TT2, respectively. TT2 also has some unsecured loans. These instruments are equity-like in nature, as per Ind-Ra’s assessment, based on their terms and conditions shared by the management. These are subordinated to the senior debt and will be paid off only after all the restricted payment conditions of the senior term loan are met and have no right to call an event of default. The waterfall arrangement also delineates the subservient nature of the sponsor debt obligations. Ind-Ra has not factored in any payment to these junior instruments for arriving at the senior debt coverages. The inclusion of these funds into the senior debt category will impact the rating.
The Negative Outlook reflects a decline in PLF of both TT1 and TT2 due to grid availability (GA) issues and low irradiation, respectively, leading to a moderation in debt service coverage ratio (DSCR) as compared to Ind-Ra’s estimates.
However, the rating is supported by the presence of a long-tenor, fixed tariff power purchase agreement (PPA) for the entire capacity of TT1 and TT2, timely receipt of revenue payments in TT1 and presence of a debt service reserve (DSR) as per the requirements of financing documents. However, the rating is constrained by the grid curtailment issues being faced by TT1 and lower generation in TT2, due to low irradiance. Ind-Ra has taken comfort from the historical track record of the sponsor in supporting its subsidiaries to address the receivable elongation. The creation of second quarter of DSR for TT2 adds further comfort to the rating. Timely sponsor support remains a key rating monitorable.
Key Rating Drivers
Muted Generation Levels: TT1’s power generation continues to be lower than the P90 estimates, primarily due to grid curtailment issues. During the 12 months ended December 2022, TT1’s PLF was about 14%, lower than the P90 estimate (adjusted for degradation). While the grid upgradation works are under development, the timelines for alleviation of GA issues could be elongated due to delays in the completion of these works. Ind-Ra has considered higher PLF in FY26, assuming the grid issues will be addressed by FYE25. Ind-Ra takes comfort from the fact that the project’s cash flows even at the existing muted generation levels are comfortable to meet all of its obligations.
TT2’s net average PLF for the 12 months ended December 2022 was about 18%, lower than the P90 estimate (adjusted for degradation). The project’s performance was severely impacted due to low irradiation. Ind-Ra will critically monitor the project for consistent annual PLF performance of above 22%. Any sustained dip in the PLFs would be a credit negative.
Moderate Counterparty Profile: Ind-Ra’s counterparty assessment relies on the PPA clause, which articulates that the tariff payment obligations on monthly bills and supplementary bills are a direct obligation of Solar Energy Corporation of India Limited (SECI). Thus, the tariff payments do not depend on the realisation of revenue by SECI from the distribution utilities. Hence, SECI fares better in terms of meeting tariff payment obligations pertaining to TT1 than when directly selling to most distribution utilities.
While 60% of the pool capacity is tied up with SECI, which continues to pay within 14 days from invoicing, with a 2% rebate, the remainder capacity of TT2 has Bangalore Electricity Supply Company Limited (BESCOM) as the counterparty, wherein there have been delayed payments since FY21. In FY22, receipts were irregular and cleared in lumpsum. However, the last payment for the invoice of October 2022 has been received within timelines. Ind-Ra will continue to monitor the receivable days from BESCOM.
Obligor-Co-obligor Structure Strengthens Credit Profile: The ratings draw strength from the obligor-co-obligor structure, with TT1 and TT2 having access to each other’s surplus cash flows (after debt servicing and maintaining of DSR) to meet any shortfall in funds for debt servicing. The terms of the transaction specify required support to be checked and extended by the surplus SPV three days before the debt servicing due dates, thus ensuring timeliness of debt servicing. The presence of a cross-default clause between the two entities provides further comfort. However, individual financial covenant testing at individual project level limits the strength of the structure. In addition to the structural benefits, the pooling of the two entities provides diversification benefits in terms of counterparty risk.
Long-term Offtakes Secure Cashflows: TT1’s credit quality is anchored by its 25-year PPA with SECI, a central government undertaking, at a fixed tariff of INR4.43 per unit. TT2 (owning 20MWAC capacity) benefits from the firm, long-term PPA with BESCOM at a fixed tariff of INR3.04 per unit. Both the PPAs provide for payment security mechanisms in the form of a revolving letter of credit equivalent to one month’s average billing, which are yet to be renewed the off-takers. Ind-Ra considers the revenue risk for the projects to be limited, given the fairly healthy revenue visibility over the balance life of the project. The ratings take further comfort from the must-run status awarded to the renewable projects.
Moderate Sponsor Profile: TT1 and TT2 are 100% subsidiaries of Solar Arise India Projects Private Limited (SAIPPL), an Indian solar independent power producer, focused on developing, owning and operating solar assets in the country. In January 2023, Thomas Lloyd Energy Impact Trust PLC (TLEI), one of the existing investors, has purchased the 100% stake in SAIPPL from Core Infrastructure India Fund Pte Ltd and Global Energy Efficiency & Renewable Energy Fund. TLEI intends to raise USD750 million (of which USD150 million has been raised till date) to invest in sustainable energy infrastructure assets in Southeast Asian nations. The group’s renewable portfolio in India includes operational capacity of 170MW and under-construction capacity of 125MW. SAIPPL, a debt-free holding company for all the projects being implemented by the group in India has reported revenue of INR308.3 million in FY22 (FY21: INR269 million), with an operating margin of 61% (63%). It had surplus cash of about INR800 million as on 10 January 2023 which can be used for supporting the group entities, as and when required. Also, the promoters have a demonstrated track record of supporting the group’s projects by infusing cash to meet any shortfall.
Low Operations Risk: Both TT1 and TT2 have five-year fixed price (with fixed annual escalation) contracts with established contractors, Juwi India Renewable Energies Private Limited and Jakson Limited, respectively, for the operations and maintenance (O&M) activities of the plants. Given the less complex nature of operating a solar plant, Ind-Ra has assessed the operations risk of these two projects to be low. While TT1’s contract would expire by FYE23, Ind-Ra will monitor the renewing or signing of new O&M contracts at competitive prices; the operating costs being significantly higher than Ind-Ra’s estimates could have a negative impact on the rating.
Liquidity Indicator – Adequate: As per the agency’s base case scenario, the projects on a consolidated basis have an average DSCR of above 1.15x over their loan tenors, with the ability to withstand moderate levels of stress on generation levels, interest rates and operating costs. The debt has standard project finance features, including a DSR equivalent to one quarter’s debt servicing requirements and an inverter replacement reserve to be fully funded by FY31 (inverter reserve of INR2.5 million created for both TT1 and TT2 as of 31 December 2022). Furthermore, the creation of second quarter DSR for TT2, acts as an additional buffer. TT2 has relied on sponsor support to meet its debt servicing in FY22 and 3QFY23, and management has confirmed that support will be provided in a timely manner ahead of accessing the DSR. In addition, TT1 and TT2 had free cash balances of INR19.6 million and INR25.1 million, respectively, on 15 December 2022. Ind-Ra will continue to monitor the liquidity and support from the sponsor, and any dip in the DSR would be a credit negative.
Moderate Debt Structure: The term loans are repayable in structured monthly instalments commencing in April 2021 and ending in March 2038 and September 2039 for TT1 and TT2, respectively. The interest rate is fixed for the first five years and will be reset every five years after disbursement. In addition, both the projects have a healthy tail period of about five years.
Ind-Ra has considered that the INR80 million of undisbursed amount in TT1 will be disbursed only after TT1 fulfils the PLF-related condition stipulated in the loan agreements. Hence, the DSCR does not include INR80 million, as the PLF has been lower than the levels stipulated in the loan agreement. Ind-Ra will monitor for any consequence in case of a breach in financial covenants of TT2 in FY23.
Moderate Technology Risk: Both the projects employ polycrystalline solar photovoltaic modules with a fixed tilt manufactured by established suppliers for 100% project capacity. A 10-year product warranty and a 25-year performance guarantee provide further comfort with regards to the solar module’s performance. Ind-Ra’s base case factors in a module degradation of 0.7% per annum each year. Ind-Ra considers technology-related risks of the projects under the structure as moderate, as all the equipment suppliers have a proven track record and experience, and have provided warranty for defects as well as minimum output.
Outlook Revision to Stable: Significant completion of grid upgradation work leading to GA above 98% for sustained period and average actual PLF (calculated for trailing 12 continuous months) of TT2 above 22% could lead to an Outlook revision to Stable.
Negative: Future developments that may, individually or collectively, lead to a rating downgrade are:
– a sustained operational or financial underperformance leading to forward-looking average DSCR falling below 1.15x on a combined basis,
– continuing underperformance in PLF, especially in TT2,
– sustained delays in receivables beyond 120 days for BESCOM,
– dip in DSR and other stipulated reserves, and absent timely sponsor support,
– deterioration in the credit profile of the sponsor and the counterparties.
TT1 owns and operates a 30MW solar power project, built at a cost of INR2,274.6 million, in the Koppal district of Karnataka. The project was won through reverse bidding in 2016. The project has signed a 25-year PPA with SECI at a fixed tariff of INR4.43/kWh, along with a viability gap funding of INR220.5 million (INR7.35 million/MW).
|Particulars (INR million)||1HFY23||FY22||FY21|
|Total operating expenses||21.3||53.7||49.9|
|EBITDA margin (%)||81.9||77.7||80.5|
|EBITDA interest coverage (x)||1.3||1.0||1.0|
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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