New Delhi : Fitch Ratings has affirmed India Green Power Holdings’ (IGPH) USD 460 million senior secured notes due 2027 at ‘BB-‘, with a stable outlook.
According to Fitch’s report, the rating on the notes reflects the ‘bb’ credit assessment of a restricted group of operating entities under ReNew Power Private Limited (BB-/Stable) – one of the largest renewable-energy independent power producers in India – notched down because of the orphan issuance structure.
IGPH is a financing vehicle that is held by a trust, and its ownership is not linked to ReNew Power.
IGPH used the proceeds of the notes largely to subscribe to non-convertible debentures (NCDs) issued by the entities in the restricted group.
The entities subsequently used the proceeds to repay their debt.
The credit profile of the restricted group is supported by the long and reasonable operating record of its renewable assets.
All of the wind and solar projects have been operating for six to 11 years, with a capacity-weighted average record of more than eight years.
The restricted group contracts 80 per cent of its total capacity with state distribution companies under long-term, fixed-price power purchase agreements (PPAs).
There is a gap of about 20 per cent between the assets’ P50 and one-year P90 energy yield forecasts.
The assessment is constrained by IGPH’s exposure to weak state-owned distribution companies such as those in Andhra Pradesh and its rating-case average debt-service coverage ratio (DSCR) of 1.46x.
The technologies deployed in IGPH’s wind and solar projects are considered proven.
The wind turbines are procured from some of the world’s largest manufacturers while the solar modules are sourced from internationally well-known suppliers – First Solar and Hareon Solar.
Operation and maintenance (O&M) for most of the wind projects is carried out by the original equipment manufacturers under 10-20-year contracts.
The O&M for the solar projects is carried out by an affiliate company, ReNew Services Private Limited, under five-year fixed-price contracts, with a 4 per cent to 5 per cent annual price escalation.
The operation risk assessment is constrained to ‘Midrange’ as the operating cost forecast is not validated by an independent technical advisor and a maintenance reserve account is not present in the bond indenture.
The energy yield forecast produced by third-party experts indicates a P50/one-year P90 spread of 20 per cent, leading to a ‘Weaker’ assessment for volume risk.
The actual load factors recorded at the portfolio level increased in the financial year ended March 2021 (FY21) to FY23.
The restricted group’s long-term, fixed-price PPAs with state distribution companies protect the portfolio from merchant price volatility.
These PPAs have a capacity-weighted residual life of about 13 years. PPAs with commercial and industrial customers have tenors ranging from five to 10 years.
Tariffs for captive wind projects are determined at a discount to grid tariffs.
Contract renewal and tariff renegotiation risk is mitigated by increasing grid tariffs and minority equity ownership of end-customers in individual projects.
IGPH, which issued the six-year (door-to-door) partially amortising senior secured bond, does not have any equity interest in the operating entities.
It is only a secured lender to the operating entities, which are owned by ReNew Power.
The bondholders benefit from partial amortisation starting from the third year, which will result in a bullet maturity of about 90 per cent of the principal in rupee terms and about 80 per cent in US dollar terms.
Management has hedged the principal payments using options, lowering the all-in cost but leaving exposure to rupee depreciation until the contracted strike price, resulting in the ‘Weaker’ debt structure assessment.
We assume the currency will stay at around Rs 82 per US dollar until FYE27 to account for principal repayments starting the third year of the bond tenor.
The redemption premium obligation on the rupee NCDs to cover any funding shortfall at IGPH will mitigate the risk of bondholders.
However, rupee depreciation that is higher than our estimates will result in a weakening of the underlying credit profile. The hedging is for 5.5 years.
The alignment of the hedging arrangement and the par call period eliminates the need for a mid-term rollover requirement.
IGPH would be obligated to extend the hedges beyond 5.5 years in the remote scenario of the bonds continuing to be outstanding.
The rupee-denominated NCDs benefit from the usual protective structural features, including a distribution lock-up at 1.15x the 12-month backward-looking DSCR.
The restricted group does not maintain a debt service reserve account or a major maintenance reserve account.
However, ReNew Power plans to support the cash flows by reversing USD15 million of inter-company loans that the restricted group extended to the parent over FY24-FY26.
IGPH will also retain all the cash generated in the last year of the bond tenor within the restricted group.
The parent has also provided an undertaking to provide cash interest at 8 per cent of the inter-company loans even beyond the bond tenor to maintain adequate liquidity in the restricted group.
The refinancing risk is mitigated by the remaining tenor of the PPAs, which extends beyond the maturity of the bond, and the parent’s guarantee.
Fitch believes the orphan Special Purpose Vehicle (SPV) issuer provides lower protection to the offshore US dollar noteholders in the case of a failure of a hedge counterparty and termination of hedge agreements before the notes mature.
The sponsor is not legally obligated to replace hedge counterparties or allowed to cover all of the additional costs associated with these events, including the early termination amount payable to defaulting hedge counterparties.
Fitch says clearer demarcation of these aspects in credit assessment through a notch of rating difference is warranted to reflect the lesser protection to US dollar noteholders on the account.
(With inputs from ANI)