Fitch Ratings has affirmed
The Outlook is Stable.
RATING RATIONALE
AGEL RG2's credit assessment is supported by its 570MW solar portfolio across two Indian states, moderately volatile generation record at portfolio level, long-term fixed-price power purchase agreements (PPAs), commercially proven technology, experienced operations and maintenance contractors, and strong credit metrics. The restricted group's (RG) financial profile with rating-case debt-service coverage ratio (DSCR) of 1.44x is stronger than that commensurate with a 'BBB-' rating for the asset portfolio, reflecting considerable rating headroom at the current level. The credit assessment is constrained by
The RG is made up of three subsidiaries of
KEY RATING DRIVERS
Experienced Contractors; Proven Technology: Operation Risk -- Midrange
AGEL RG2 consists of 570MW of polycrystalline solar projects, a proven technology with a long operating history. We regard the operation of these types of solar projects as straightforward and the solar modules are provided by internationally known suppliers.
Operation and maintenance work are carried out by an affiliate company,
Generation Lower than Expectations: Revenue Risk (Volume) -- Midrange
The energy-yield forecast produced by third-party experts indicates an overall P50/one-year P90 spread of about 7%, leading to the 'Midrange' volume risk assessment. For the last few years, the plants based in
Long-Term Fixed-Price PPAs: Revenue Risk (Price) -- Stronger
AGEL RG2 contracts 61% of its total capacity with sovereign-backed
Protective Structural Features, Moderate Refinancing Risk: Debt Structure - Stronger
The debt is a senior-secured 20-year partially amortising bond with a 24% balloon repayment at maturity. We assume the notes will be refinanced at maturity, with the refinancing debt to be amortised across the remaining PPA terms. Noteholders benefit from a standard security package and protective structural features that restrict distributions.
All cash will be trapped if the 12-month backward-looking DSCR drops below 1.35x or if the project life cover ratio drops below 1.60x. Distribution will also be restricted if there is a reduction of the EBITDA mix from sovereign-backed off-takers to less than 65% or if the cash flow available for debt servicing from sovereign-backed off-takers is insufficient to cover the outstanding debt. The debt has a six-month debt-service reserve.
Group Governance Risks
Governance weaknesses at the sponsor level and other group entities, including a highly concentrated shareholding structure across group entities and aggressive debt-funded investments at some entities, can expose all Adani group-related companies to higher contagion risks than previously considered, which can affect their financial flexibility. We believe these group-related risks to be lower for AGEL RG2 due to legal ring-fencing as per a strict cash flow waterfall mechanism in the US dollar notes. The group is re-evaluating its investment plans, especially in non-infrastructure businesses.
The Adani family recently sold
Financial Profile
Fitch assumes the 24% bullet principal repayment will be refinanced upon maturity by fully amortising debt across the remaining PPA terms at a higher refinancing interest rate of 10.5%. Fitch's base case includes a P50 energy production assumption, 5% production haircut and repowering capex to arrest 0.5% annual degradation. We assume flat cost of modules, which are required for repowering capex. The assumptions generate an average annual DSCR of 1.54x, with a minimum of 1.41x.
Production assumptions under Fitch's rating case include one-year P90 energy yield, 5% production haircut and repowering capex to arrest 0.6% annual degradation. We also assume 1% annual increase in cost of modules, which are required for repowering capex. We also apply 10% stress on operating expenses. The assumptions generate an average annual DSCR of 1.44x, with a minimum of 1.28x under Fitch's rating case.
We also run an alternate rating case (AFRC) in which we assume 0.6% annual degradation of solar panels with zero repowering capex. The AFRC is to ensure that the credit assessment does not unduly benefit from the repowering capex given uncertainties around its forecast for the medium-to-long term.
We consider revenue from SECI, which contracts 61% of AGEL RG2's total capacity, as fully contracted revenue and apply the fully contracted project threshold. SECI's credit quality does not constrain the rating, as revenue exposure to SECI presents a systemic sector risk.
Fitch does not rate the two state companies that purchase power from AGEL RG2 under the PPAs, but we do not believe a default by one of the companies would necessarily lead to a default of the transaction. However, we see it as prudent to apply the merchant project threshold for the revenue from the state distribution companies. Therefore, we apply a revenue-based weighted-average threshold to determine the rating, while the cash flow is evaluated based on the contracted prices. The project's average annual DSCR of 1.44x, with the minimum of 1.28x under Fitch's rating case, is well above the revenue-based weighted-average threshold for the 'bbb' level.
PEER GROUP
AGEL RG2 is rated a notch higher than
AGEL RG2 also compares well with
Azure RG3 and Azure RG2 have weaker off-taker profiles, with capacity of 34% and 15%, respectively, contracted with SECI, against AGEL RG2's 61%. This results in a lower metric threshold for AGEL RG2's rating determination. In addition, Azure RG3's and Azure RG2's ratings and RWN reflect the ongoing corporate governance issues in the group. AGEL RG2 has strong debt structures, with superior noteholder protection features. These include stronger distribution lock-up tests, debt-service reserve accounts and capex reserve accounts.
AGEL RG2 is least exposed to refinancing risk, as 76% of its principal is amortised across 20 years, while the remainder is bullet debt. Azure RG3's debt is partially amortising via scheduled amortisation and a cash sweep and Azure RG2 has bullet repayments at maturity. AGEL RG2's rating-case average DSCR of 1.44x is higher than Azure RG3's 1.43x and Azure RG2's 1.42x. The qualitative strengths of AGEL RG2 and its financial metrics against relevant thresholds support the higher rating.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Average DSCR across the group's PPA terms dropping below 1.30x;
Lowering of
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
We do not expect a positive rating action in the near term as the rating is capped by
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
TRANSACTION SUMMARY
AGEL RG2 is an RG consisting of three SPVs under AGEL with total capacity of 570MW in
CREDIT UPDATE
AGEL RG2's FY23 generation was 1,320 million units, which was marginally better than the P90 generation level of 1,294 million units. Its 200MW plant in the
Plant availability of the AGEL RG2 portfolio in FY23 declined marginally to 99.5% from 99.9% in FY22. Grid availability improved slightly to 99.0% from 98.9% due to reduction in curtailment at the Nalwar plant due to infrastructure improvements. AGEL RG2's receivable position remained healthy as of
SECURITY
The US dollar bonds issued by the three SPVs in the RG benefit from a standard security package, including a charge over certain immobile and movable assets of the co-issuer, and a share pledge on over 100% of the shares of each of the SPV issuers.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The rating on the notes is capped by
ESG Considerations
AGEL RG2 has an ESG Relevance Score of '4' for Governance Structure due to the complexity of its group structure at the shareholder level, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
AGEL RG2 has an ESG Relevance Score of '4' for Group Structure due to the concentration of ownership, with a large majority stake indirectly held by
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
(C) 2023 Electronic News Publishing, source