India Ratings and Research (Ind-Ra) has revised its Outlook on Kamuthi Solar Power Limited’s (KSPL) rupee term loan to Negative from Stable, while affirming its rating at ‘IND A+(CE)’. The detailed rating actions are as follows:
*The final rating has been assigned after the receipt of final documentation, conforming to the information already received by Ind-Ra.
India Ratings and Research (Ind-Ra) has changed the suffix to ‘CE’ from ‘SO’ for outstanding ratings of relevant instruments of 81 issuers and has removed the ‘SO’ suffix from ratings of relevant instruments of 35 issuers to comply with the SEBI circular. The change in suffix for these instruments does not result in any change in rating on the said instruments.
Analytical Approach: The ratings are based on the analysis of debt facilities amounting to INR33,053 million, borrowed collectively by Adani Green Energy (Tamil Nadu) Limited and its group companies KSPL, Kamuthi Renewable Energy Limited, Ramnad Solar Power Limited and Ramnad Renewable Energy Limited under the obligor and co-obligor structure. The companies have jointly been referred to as special purpose vehicles (SPVs).
Ind-Ra has considered the residual cash flow approach for the ratings, in view of the obligor and co-obligor structure’s feature of transferring money to co-obligors only in the event of insufficient funds in their respective trust and retention accounts. While the rating of the combined structure is assigned to the individual SPV – KSPL’s INR11,012 million debt, the unsupported rating is assessed by stripping off the obligor and co-obligor structure and linked to the individual credit metrics of the SPVs. Since the working capital facilities are at equal charge with rupee term loan lenders as per the waterfall mechanism along with cross default provision, the rating of working capital is pegged to the term loan facility rating.
The Negative Outlook reflects Ind-Ra’s expectation of a stretched liquidity position for KSPL in FY21, owing to a sharp increase in receivable days and thus, working capital utilisation.
The affirmation reflects revenue visibility in the form of a long-term power purchase agreement (PPA) at a healthy tariff, the plant load factor (PLF) being in line with base case assumptions and a low operational risk. However, the ratings are constrained by the weakening profile of the counterparty and risk of exposure to a single counterparty.
Key Rating Drivers
Firm Offtake Arrangement but Increasing Counterparty Risk: The SPVs have signed a long-term PPA for the entire 648MW capacity with counterparty – Tamil Nadu Generation and Distribution Corporation Limited at a weighted average tariff of INR6.02/kWh. The company’s receivable days surged to 330 days in 10MFY20, due to TANGEDCO’s deteriorating financial health and resultantly, the working capital utilisation rose to 65% from 33%.
However, the offtaker has improved its payments frequency to a monthly basis since September 2019, from a frequency of once in three-to-four months, up to February 2020.
Pooled Cash Flow Structure: The ratings factor in the diversified nature of cash flows arriving from various projects and the obligor co-obligor project structure. Under this structure, the residual cash flows from the projects are considered to meet the debt service shortfall in other SPVs. The combined solar capacity of all SPVs is 648MW and the project has the ability to withstand moderate stress on the operational parameters and interest rates.
Robust Blended Coverage Ratio Provides Adequate Comfort: Ind-Ra’s projections indicate a healthy average debt service coverage ratio (DSCR) of over 1.4x at P90 PLF. Additionally, the surplus funds from other projects can be used to meet any contingencies. Thus, the SPVs’ overall coverages provide strength to the structure. Besides, there exists adequate liquidity for debt servicing in case of any temporary mismatch in cash flows in the form of a) a debt service reserve (DSR) of INR1,890 million for all projects and b) sanctioned working capital limits of INR1,880 million, equivalent to approximately four months of receivables. The transaction documents stipulate a DSR of INR2,500 million. The remaining part of DSR is a part of undisbursed amount from the lender and the required enhancement of DSR to mandated levels is expected to be completed before 31 March 2020, as per the management.
Adequate Solar Resource and Consistent PLF Performance: The project completed over three-and-a-half years of operations in February 2020 and the average PLF of the entire 648MW capacity was around 19.1% during 10MFY20, better than the P90 PLF estimate of the previous corresponding period, despite the grid curtailment of 2.25% in the same period. The plant location and solar irradiation level favour the achievement of a high PLF, as per the management. A significantly lower breakeven PLF than the P90 estimates lends credence to the cash flows.
Comfortable Debt Structure: Any surplus in one of the five projects can be used for debt servicing of the other entity which is in deficit. Structurally, the SPVs benefit from a long-tenor amortisation profile; the debt repayment is in 216 uniquely structured monthly instalments (starting April 2019 and ending in January 2037) for 18 years. The restrictive covenants such as distribution of cash to the sponsor only after the maintenance of minimum DSCR and two quarters of reserves lend comfort to the ratings.
Established Sponsor Profile: AGEL has commissioned several capacities in the past within the scheduled completion time. It has a renewable portfolio of 5,290MW, of which 2,320MW was operational and 2,970MW was under construction, as of 1HFY20. Although the operational capacity is skewed towards solar projects at 2,148MW (92.5%), there is a higher proportion of wind and hybrid projects in the under-construction portfolio (wind: 1,505MW, 50.7%; hybrid: 990MW, 33.3%). At the consolidated level, AGEL reported revenue of INR20,600 million in FY19 (FY18: INR14,800 million), EBITDA of INR17,100 million (INR8,300 million) and net leverage (net debt/EBITDA) of 6.3x (11.5x).
Liquidity Indicator-Adequate: As on 5 March 2020, the SPVs had a cash balance of INR 177.36 million in the trust and retention account and an unused working capital facility (undrawn portion is INR589 million out of INR1,880 million).. Meanwhile, the management is planning to increase the working capital limits at each SPV due to the soaring receivables. Although this may provide necessary respite to the liquidity, the increased use of working capital adds to the finance costs and eventually reduces the debt service coverage to an extent.
Additionally, to address the inverter issues, a major maintenance reserve (MMR) will be created within 10 years of the first disbursement i.e. before March 2029.
Low Operating Risk: Generally, operations at a solar project are of low complexity. An in-house team carries out the operation and maintenance of the project. The SPVs incurred operation and maintenance expenses of INR0.51 million/MW in FY19, lower than those of other Ind-Ra-rated peers. Any significant increase in operating expenses beyond the specified level may impact the ratings.
Minimal Technical Risk: The SPVs use polycrystalline solar photovoltaic modules. The solar equipment supply contracts safeguard the projects from product failure through an adequate 12-year product warranty and a 25-year power warranty. Ind-Ra’s base case factors in a module degradation of 2.5% in the first year of operations and 0.7% thereafter.
Counterparty and Geographical Concentration Risk: The presence of a single counterparty risk constrains the ratings. Moreover, the presence of the entire project capacity in a single region limits resilience to grid curtailment.
Negative: Individually or collectively, the following would affect the ratings:
– continued payment delays from the offtaker with no reduction from 330 days
– further deterioration in the credit profile of TANGEDCO
– operational performance consistently below P90 estimates
– non-creation of additional mandated DSR before March 2020
– any deviation from the pooled structure and depletion of DSR
Positive: Sustained receivables below three months from the offtaker, combined with an improvement in the plant performance beyond 20.3% PLF resulting in a minimum DSCR of above 1.15x could result in a positive rating action
Individually or collectively, the following would affect the ratings:
– plant generation falling below P90 capacity
– payment delays exceeding 12 months of operating revenue
– DSCR below 1.10x
– depletion of DSRA
– increase in working capital limits above 70% for the current limits