SEPEPL is one of five operational solar assets with an aggregate capacity of 317MW (peak) being sold by Shapoorji Pallonji Infrastructure Capital Company Private Limited (SPICCPL, a wholly owned subsidiary of Shapoorji Pallonji and Company Private Limited (the group flagship company)) to the affiliate(s) of Kohlberg Kravis Roberts & Co. L.P. (together referred to as KKR). While the share purchase agreement was executed in April 2020, the acquisition is in the closure stage. SEPEPL proposes to refinance its existing term loan with the proposed short-term bridge facility upon the acquisition.
The ratings for the proposed facilities are based on the terms and conditions of the term sheets shared with Ind-Ra by KKR. The agency has analysed the project at a standalone level while rating the proposed senior debt facilities. In addition to plain equity, Terra Asia Holdings II Pte Ltd (SEPEPL’s proposed holding company post the acquisition and an affiliate of KKR) is likely to infuse funds in the form of compulsorily convertible debentures (CCDs). The financing documents delineate the subordination of any sponsor debt obligations including these CCDs. Ind-Ra has not considered the servicing of these subordinated sponsor debt obligations while calculating the senior debt coverages to arrive at the ratings, and has considered sponsor debt as equity-like instruments. The inclusion of these funds into the senior debt category could impact the ratings.
The assigned provisional ratings reflect SEPEPL’s demonstrated operational history of over 26 months, the presence of a long-term power purchase agreement (PPA) with a strong counterparty, adequate liquidity within the project and comfortable projected coverage ratios for the PPA tenor. However, the ratings are constrained by the presence of substantial refinancing risk in the form of a bullet maturity at the end of 12 months of date of drawl for the proposed short-term bridge facility.
Ind-Ra will maintain the rating of the existing rupee term loans on RWE until the acquisition is complete.
KEY RATING DRIVERS
Short-term Debt Exposes Project to Refinancing Risk: The proposed short-term bridge facility will be used to refinance the existing debt of SEPEPL and other existing liabilities of INR140 million (including trade payables). The loan amortises in 12 months with four equal quarterly repayments of INR65.3 million each with the balance to be paid on maturity as a bullet repayment. The proposed terms require SEPEPL to have a signed sanction letter/approved and signed term sheet for refinancing the bridge facility within 10 months from first utilisation. In addition, Terra Asia Holdings II plans to provide the lenders a letter of intent indicating that it is considering arranging funds for refinancing at the end of the loan tenor. Ind-Ra will continue to monitor the status of refinancing; any major delays in the tying up of debt for refinancing will result in a rating downgrade.
Stable Operational History: SEPEPL has demonstrated a stable operational track record of over 26 months since commissioning in March 2018. In the 12 months ended July 2020, the three plants generated power at a net average plant load factor of 21.88%, in line with Ind-Ra’s estimates. The project’s generation levels have been in line with the P90 estimates (accounting for degradation). The weighted average P90 and P75 estimates for the project are 22.14% and 23.19%, respectively, according to the independent resource assessments. The average monthly plant and grid availabilities were above 99% over the same period.
Long-term Offtake Agreement, Strong Counterparty Secures Cash Flows: The ratings are anchored by SEPEPL’s 25-year long-term PPA with Solar Energy Corporation of India Limited (SECI) for the entire 130MW capacity across three locations in Maharashtra at a tariff of INR4.43/kWh, with a viability gap funding (VGF) of INR247 million (INR1.9 million/MW). The presence of a strong counterparty, along with the long-term nature of the tie-up providing full revenue visibility, supports the ratings. SECI has been paying within three months from the date of invoicing. SEPEPL has received the entire VGF from SECI for the 50MW capacity with the documentation for the balance being evaluated.
Robust Financial Performance: SEPEPL’s revenue from operations grew about 7.4% yoy to INR1,110.96 million in FY20, on the back of higher generation levels. The project recorded a higher EBITDA of INR1,069.35 million in FY20 compared to INR936.28 million in FY19. The debt to EBITDA ratio fell to 6.7x in FY20 (FY19: 7.87x) as a result of higher EBITDA and reduced debt. FY20 numbers are provisional in nature.
Change in Sponsors: SEPEPL is 51% owned by SPICCPL and 49% by Shapoorji Pallonji Solar Holdings Private Limited (a 100% subsidiary of SPICCPL). Upon the completion of the acquisition, SEPEPL will be wholly owned by Terra Asia Holdings II. KKR is a leading global investment firm that manages multiple alternative asset classes, including private equity, real estate and credit, with strategic partners that manage hedge funds. KKR has a global focus on renewables with a portfolio of about 10,000MW in various geographies including the US, Spain, France and Canada. India is a key part of KKR’s Asia infrastructure strategy, and the announced transaction for the acquisition of SPICCPL’s operational solar assets is its second investment in the country as part of its infrastructure strategy.
Minimum Technology Risk: SEPEPL’s plants employ polycrystalline solar photovoltaic panels manufactured by multiple suppliers including Canadian Solar Inc., Chint Solar Zhejiang Co. Ltd. and Risen Energy Co. Ltd.. The polycrystalline solar photovoltaic technology has an operational track record of over 30 years. Moreover, a product warranty of 10-to-12 years and a warranty on degradation provide some comfort with respect to the solar module performance.
Modest Debt Structure: The proposed debt has a floating interest rate, linked to either one-year marginal cost of lending rate or three-month treasury bill rates (to be finalised by lenders) with step-up in spread at regular intervals over the loan tenor. The debt structure does not permit any cash take out (other than permitted initial upstreaming) during the loan tenor. The proposed terms also stipulate a debt service reserve (DSR) equivalent to one quarter’s debt servicing obligations to be created from the existing DSR within 30 days of first utilisation. SEPEPL also proposes to avail a working capital facility of INR250 million, with drawing power covering up to 120 days’ receivables of the project. Ind-Ra has used a synthetic amortisation profile and stressed on the interest rates to test the resilience of the project coverage ratios.
Liquidity Indicator – Adequate: The project has comfortable coverage ratios of above 1.25x throughout the 12-month proposed loan tenor (excluding the date of the bullet maturity). The coverages are resilient to moderate levels of stress applied on generation, operating expenses and interest rates. As on 31 July 2020, SEPEPL had cash and cash equivalents of about INR170 million. The project maintains a DSR of about INR464 million for its existing loan and following refinancing, will be required to create a one-quarter DSR. SECI’s track record of regularly paying within 90 days from raising invoices and letters of credit provided by SECI for one month’s billing as a payment security mitigate the risk of cash flow mismatches to some extent. Furthermore, to mitigate any moderate elongation in the payment cycle of SECI, SEPEPL proposes to avail a working capital facility of INR250 million, with drawing power covering up to 120 days’ receivables of the project.
In-house Operation and Maintenance Arrangement: The operation and maintenance of SEPEPL is being carried out in-house by Shapoorji Pallonji Solar Holdings under a fixed-price contract expiring in March 2021. The operator has an extensive experience of operating solar projects in its portfolio. The current operator is likely to continue for the remainder of the O&M agreement and upon expiry of the agreement, SEPEPL will renegotiate the contract with one of the operators allowed under the financing documents. Underperformance due to operating inefficiencies and operating costs higher than Ind-Ra’s base case could impact the ratings.
Negative: The forward looking project life coverage ratio falling below 1.2x, sustained and significant payment delays from SECI beyond 120 days, delays in arranging refinancing (submitting signed sanction letter/approved and signed term sheet) for the bridge facility at least two months ahead of maturity, the depletion of internal liquidity including DSR, the non-adherence to the letter of intent and the absence of support from Terra Asia Holdings II could lead to a rating downgrade.
The RWE on the existing rupee term loans indicates that the ratings may be affirmed, downgraded or upgraded upon resolution. Ind-Ra will review the RWE once there is clarity on debt-related terms and any other impact due to the sale of the asset.