India Ratings and Research (Ind-Ra) has upgraded Acme HisarSolar Power Private Limited’s (AHSPPL) senior project term loans’ rating to ‘IND A’ from ‘IND BBB+’. The Outlook is Stable. The detailed rating action is as follows:
|Instrument Type||Date of Issuance||Coupon Rate (%)||Maturity Date||Size of Issue (million)||Rating/Outlook||Rating Action|
|Senior project term loans||–||–||30 June 2034||INR2,410.4 (reduced from INR2,579.5)||IND A/Stable||Upgraded|
Analytical Approach: AHSPPL is one of four operational solar assets acquired by Actis GreenGen Limited (Actis) from ACME Solar Holdings Limited on 13 July 2020. The agency has analysed the project at a standalone level while rating the senior debt facilities. In addition to plain equity, Actis has injected funds in the form of optionally convertible debentures (OCDs). The financing documents delineate the subordination of any sponsor debt obligations including these OCDs. Ind-Ra has not considered the servicing of these subordinated sponsor debt obligations while calculating the debt service coverage ratio (DSCR) to arrive at the rating, and has considered sponsor debt as equity-like instruments in line with the financing documents. The inclusion of these funds into the senior debt category could impact the rating.
The upgrade reflects presence of a strong sponsor, creation of a debt service reserve (DSR) through a guarantee from the new sponsor’s, firm power sale agreement with strong counterparty, a likely improvement in coverage ratios due to the ongoing direct current (DC) capacity augmentation progress and likely decrease in operations & maintenance (O&M) costs led by revision in O&M contracts. However, the rating is constrained by the inherent risks associated with solar projects including resource variations.
KEY RATING DRIVERS
Change in Sponsor: AHSPPL is 100% owned by Actis, which is a Mauritius-based holding company wholly-owned by Actis GreenLife Limited, which in turn is wholly-owned by Actis Long Life Infrastructure Fund (ALLIF). Actis is a global investment manager with focus on growth markets across Africa, Asia and Latin America. Actis currently manages about USD10 billion of assets under management across energy & infrastructure, real estate and private equity businesses. The management has confirmed that India is a key market for Actis’s Asia’s business and the acquisition of ABSPPL’s operational solar assets is its key strategic investment in the country as part of its infrastructure strategy. The agency has relied on the sponsor’s ability to fund any contingencies in the project.
Actis owns 99.99% holding in four special purpose vehicles and one share is held by Actis GreenLife. Guarantees have been issued to lending banks and counterparties using bridge lines available at ALLIF level. Of the USD1,234 million commitment with ALLIF, around USD300 million has been invested, resulting in a non-committed capital of over USD900 million.
Firm Offtake Agreement Secures Cash Flows: The rating benefits from firm power sale contract for 25-years with Solar Energy Corporation of India (SECI) at a fixed tariff of INR4.43 per unit. SECI has in turn signed a power sale agreement with Andhra Pradesh Southern Power Distribution Company Limited to sell power at a trading margin of INR0.07 per unit. The power purchase agreement (PPA) stipulates a guaranteed offtake of 116.59 million units corresponding to a plant load factor (PLF) of 26.6% every year. Any generation, above this level, may be purchased by SECI at a tariff of INR3.00 per unit. The project is obligated as per the PPA to generate at least 90.09 million units corresponding to a PLF of 20.6% every year. Failure to meet this generation level shall make the company liable to pay compensation to SECI, subject to a minimum of 25% of the applicable tariff. Ind-Ra believes of the decline in PLF to below 20.6% to be unlikely as there is adequate cushion on DC capacity.
The PPA also specifies a letter of credit equivalent to one month’s billing amount to be created by SECI as a payment security mechanism. The letter of credit has been created by SECI equivalent to average one month’s billing amount. AHSPPL is also eligible to receive a viability gap funding amount of INR275 million in six annual instalments. The company received the first tranche of INR137.5 million on 27 May 2019 and expects to receive the second tranche by December 2020.
Liquidity Indicator – Adequate: The project’s inbuilt DSR of INR107.3million (funded from project cost) and cash of INR163.6 million as of 30 September 2020 support liquidity to a certain extent. The new sponsor has given corporate guarantee for maintaining DSR for additional (second) quarter, with gross liquidity equivalent to six months’ of debt servicing obligations as stipulated in the financing agreements.
Low Counterparty Risk: The rating is bolstered by the credit profile of SECI. Since project commissioning, SECI has paid bills within an average of 75 days. To pay within 60 days, SECI charges a rebate of 1% or 2% in line with the PPA provisions. Renewable purchase obligations require the distribution utilities to buy solar power and the PPA was signed through reverse bidding. Termination is possible under the PPA if an event of default is triggered by the other party (off-taker). Payment security fund is available for a pool of projects selling power to SECI, however, there is lack of clarity on the application of the fund to prevent delays in tariff payments among different projects. Ind-Ra’s assessment of counterparty is strong.
Low Operating Risk, New O&M Contractor: The project has executed fresh operation and maintenance (O&M) agreement with Mahindra Teqo Private Limited for an agreed price with a fixed annual escalation. The agreement allows both the parties to review the operating fee after every year. The special purpose vehicle will also have to incur solar park charges and land lease charges with a fixed escalation year-on-year. Ind-Ra attributes low operating risk for the project, given the operator’s track record and experience, and low complexity of solar projects.
Improving Debt Coverage Metrics Supported by DC Capacity Augmentation: The project’s debt structure has a flat debt amortisation schedule, leading to restricted cash flows available for debt servicing up to FY21. The project has a comfortable average DSCR of above 1.30x, with the ability to withstand moderate levels of stress on generation, expenses, receivable days and interest rates over the entire debt tenure. In Ind-Ra’s opinion, the structure has reasonable resilience to the moderate amount of stresses applied on the generation levels, operating costs and increase in receivable days from the off-taker. However, any pressure on margins driven by lower PLF and higher O&M expenses could have an adverse effect on project cash flows.
Moderate Operational Track Record: The asset has an operating track record of more than 24 months since commissioning on 21 July 2018. AHSPPL’s generation performance has improved over the 12 months ended March2020 due to operational stabilisation led by full DC capacity ramp up. The performance of solar power projects is susceptible to technological uncertainties, primarily in the initial period of operations. Given sensitivity of cash flows of a solar power project to the PLF is high, these risks can impair debt servicing cushions available for solar projects.
Moderate Debt Structure: The rated debt is repayable over 60 equal quarterly instalments ending FY35. The interest rate is payable quarterly. The project has standard project finance features including cash flow waterfall, a major maintenance reserve (MMR) equalling 5% of module cost (25% of which is to be created within five years from the commercial operations date) and a DSR to cover peak interest and principal repayments for ensuing two quarters. Under loan terms, cash generated in the project will be trapped until two quarters’ DSR is created. Part of equity has been funded in the form of OCDs from the sponsor. Ind-Ra takes comfort from the waterfall mechanism, restricted payment conditions and other terms prioritising the senior debt. Ind-Ra will review the rating in the event of any adverse changes affecting the cash flows for senior debt and if rights of OCDs could impede the senior debt servicing. AHSPPL reported revenue of INR509.98 million in FY20 (FY19: IINR322.2 million) and EBITDA of INR480.63 million (FY19: INR275.4 million).