India Ratings and Research (Ind-Ra) has undertaken the following rating action on Hindupur Solar Park Private Limited’s (HSPPL) rupee term loan:
Analytical Approach: Ind-Ra has factored inthe cash flow support available to HSPPL from three other projects – Polepally Solar Parks Private Limited, Mahabubnagar Solar Parks Private Limited and Winsol Solar Fields (Polepally) Private Limited – under the obligor co-obligor structure, while arriving at the rating. All the four entities are fully owned by Vector Green Energy Private Limited and are at the same rating level. Ind-Ra has taken a consolidated approach to rate the overall structure at ‘CE’ level of rating, considering that funds can be transferred at any point of time from a surplus entity to a shortfall entity from the surplus account, even though covenant testing is at individual level.
The maintaining of the RWN reflects the uncertainty with respect to the receipt of tariff in line with the power sale agreement (for HSPPL) and delayed receipt of payments from offtakers.
The off-taker, Southern Power Distribution Company of Andhra Pradesh Limited (SPDCAPL), has continued to make tariff payments at the interim level of INR2.44/kWh, which is much lower than the original power purchase agreement tariff for HSPPL. This along with delays in monthly payments from the Andhra Pradesh (AP) and Telangana state utilities has led to cash flow stress in the overall pooled structure. However, the structure has a comfortable liquidity position, supported by unencumbered cash balance, reserves and unutilised working capital limits. Any sustained delays in litigation, leading to a prolonged period of payment at a lower interim tariff to HSPPL by SPDCAPL and /or continuing delays in monthly payments from the AP and Telangana state utilities could be negative for the project ratings.
Key Rating Drivers
Continued Payment at Lower Provisional Tariff for HSPPL (AP Project): During October 2018-September 2019, HSPPL received payments within an average of 256 days (only provisional tariff received after the month of September 2018) from the date of invoice from the off-taker (AP state utility). HSPPL received the last payment for the power supplied during September 2019-January 2020. The management expects to receive the payment for the additional three months of revenue before 30 April 2020, based on the funds being released by AP government to the state discom. The delays in payment from the off-takers and payment at a lower provisional tariff for HSPPL are credit negative for the pooled structure as per Ind-Ra.
Liquidity Indicator – Adequate: Liquidity position continues to be adequate due to the presence of full two quarters of debt servicing, an operation and maintenance (O&M) reserve equivalent to one quarter of operating expenses, working capital availability equivalent to about four months of project revenue, and sufficient cash balance. In the past, HSPPL’s cash balance has been used to partially repay the outstanding working capital limits; Ind-Ra considers this to be a prudent liquidity management practice.
As per Ind-Ra’s base case analysis, undrawn working capital, cash balance and all the reserves combined would be sufficient for meeting 16-17 months of debt servicing requirements on a consolidated level across all the four entities. However, any further delay in payment from the offtakers and continued payment at the provisional tariff level for AP projects would put pressure on the liquidity profile of the structure and would alter the base case assumptions; hence, Ind-Ra will closely monitor the same.
Long-Term Offtake Secures Cash flows: HSPPL comprises two projects of 40MW each, located across two locations (Anantpur and Chittoor) in the Anantapur district of Andhra Pradesh. Both the projects have separate 25-year power purchase agreements (PPAs) with Southern Power Distribution Company of Andhra Pradesh Limited. The tariff is INR5.25/unit and INR5.35/unit for the Anantpur and Chittoor projects, respectively, with a 3% annual escalation for the first 10 years and a fixed tariff for the next 15 years. This arrangement provides some stability to the revenue flows. However, the off-taker has a weak credit profile and any further significant delay in receiving payments can impact the rating.
Demonstrated Obligor Co-Obligor Structure Mechanism: Excess cash with any of the four co-obligor entities can be used for debt servicing or for the creation of a debt service reserve account for any of the other three entities in the event of a shortfall, as per the defined waterfall mechanism. The track record of inter-company fund transfers between the four entities (as per specified cash waterfall mechanism), ensuring timely debt servicing, demonstrates the effectiveness of the obligor co-obligor structure.
Strong Group Background: Global Infrastructure Partners (GIP) has taken over the management of India Infrastructure Fund II from IDFC Alternatives Limited in a deal concluded in FY19. India Infrastructure Fund II is the sole shareholder of VGEPL, which is the holding company for renewable assets of the group including HSPPL. GIP is a leading global, independent infrastructure investor. GIP-managed funds invest in infrastructure assets in energy, transport and water/waste sectors and manages over USD72 billion globally for its investors. Additionally, the companies in GIP’s portfolio have combined annual revenue of more than USD47 billion and jointly employ over 68,000 people. Ind-Ra considers GIP’s experience of more than a decade and its expertise in the infrastructure space to be critical for the ratings.
Debt Structure and Reserves Ensure Sufficient Liquidity: The debt for the Anantapur and Chittoor projects is repayable over the long term in 71 and 72 quarterly instalments, respectively, commencing from June 2018. The structure has provisions for a debt service reserve for two quarters of debt servicing (created in the form of fixed deposit for a sum of INR282.8 million), one month of O&M reserve (INR20.9 million created), inverter maintenance reserve, working capital reserve, grid reserve and PPA receivables reserve, apart from a cash sweep clause for debt service coverage ratio up to 1.2x. Also, the structure is resilient to moderate amount of stresses applied on generation levels, operating costs and increase in receivable days from the off-taker.
Minimum Technology Risk: The plant is configured with thin film technology-based silicon modules manufactured by First Solar. The presence of a tier-1 solar panel supplier and industry standard warranties mitigate the technology risk to a large extent.
Satisfactory O&M arrangement at Fixed Price: The O&M of the project is being carried out by Sterling and Wilson Private Limited which has signed a contract for three years at a fixed price and escalation (year-on-year). Sterling and Wilson is India’s largest high voltage and low voltage electrical and mechanical, electrical and plumbing contractor, third-largest heating, ventilation and air conditioning contractor. It is also ranked among the largest global solar engineering, procurement and construction players, with a demonstrated solar project installation capability of 1-125MW. The limited technological complexities involved in the O&M of solar projects provide additional comfort to the ratings.
The RWN indicates that the rating may be either affirmed or downgraded. Ind-Ra will resolve the RWN once it has clarity on the tariff from the AP discom for HSPPL.
Negative: Sustainedpayment delays from the offtaker, continuation of the provisional tariff of INR2.44/kWh for a prolonged period, and operational and financial performance being weaker than Ind-Ra’s base case scenario, leading to debt service coverage ratio falling below 1.15x on a sustained basis could result in a negative rating action.
HSPPL owns and operates a total of 80MW solar photovoltaic plants across two locations in the Anantapur and Chittoor districts of Andhra Pradesh. HSPPL is 100% held by the sponsor – VGEPL. The entire capacity was fully commissioned for commercial production in June 2016.