To arrive at the ratings, Ind-Ra continues to factor in the cash flow support available to Shakumbhari from five other projects – Chudiala Solar Projects Private Limited, Haridwar Solar Power Projects Private Limited, Bhagwanpur Solar Power Projects Private Limited, Ballupur Solar Power Projects Private Limited and Bindookhadak Solar Projects Private Limited, as per the terms of the financing documents. Ind-Ra rates the RTLs of all the six projects at ‘IND A’/Stable. In the event of an insufficiency of funds/a shortfall in debt servicing in any co-obligor, the lenders will utilise the surplus cash in the trust and retention account (TRA) of other co-obligors to meet this shortfall, prior to making any distribution to the sponsors. The fund flow from the cash-surplus special purpose vehicle (SPV) to the cash-deficit SPV will follow the TRA waterfall mechanism. The project document contains features such as cross-default clauses, cross-guarantees among the participant obligors, the cross-securitisation of surplus cash flows among co-obligors, allowing a movement of surplus funds among the co-obligors and consolidated covenant test prior to the restricted payment conditions.
The projects, at a consolidated level, had compulsory convertible debentures (CCDs) and non-convertible debentures (NCDs) of INR716.5 million as on 31 March 2023. These instruments are equity-like in nature, as per Ind-Ra’s assessment, based on their terms and conditions in the existing financing documents. These are subordinated to the senior debt and will be paid off only after all restricted payment conditions of the senior lenders are met and have no right to call an event of default. The waterfall arrangement also delineates the subservient nature of sponsor debt obligations. Ind-Ra has not factored in any payments to these junior instruments for arriving at senior debt coverages. The inclusion of these funds into the senior debt category will impact the rating.
The rating is anchored by the presence of long-term fixed-tariff PPAs with a moderate-to-strong counterparty Uttarakhand Power Corporation Limited (UPCL), the established track record of operations, financial performance in line with the Ind-Ra estimates, and adequate liquidity maintained in each of the projects. The agency will monitor the generation level, the project’s liquidity and the functioning of the pooled structure. The rating is constrained by the inherent risks associated with solar resource variations.
Key Rating Drivers
Obligor Co-Obligor Pooled Structure Offers Strength: Surplus cash with any of the six projects can be used for debt servicing of any of the other entities in case of a shortfall, from the surplus account of the projects. The structure tests the consolidated financial covenant for all the borrowers before making restricted payments to the sponsors. The structure’s other strong feature includes the movement of funds across co-obligors when there is a deficiency in any obligor, prior to the debt servicing date. This, coupled with the cross-default clause and cross-guarantees among the SPVs, along with the cross-securitisation of surplus cash flows among the co-obligors, bolster the structure’s strength. In case of any change in the structure and fund flow movement mechanism, the rating would be impacted.
Long-Term Offtake Secures Cash Flows: The projects have entered into 25-year PPAs with UPCL at a weighted average tariff of INR5.80/kWh for the entire capacity of 60MW (including all six projects), thereby mitigating the revenue risk to a large extent. The PPAs stipulate a guaranteed offtake corresponding to a PLF of 22% every year. Any generation above this level may be purchased by UPCL at a tariff of 50% of the original tariff for each project. As per the PPAs, the projects are obligated, to generate a minimum PLF of 12% every year. A failure to meet this generation level shall make them liable to pay compensation to UPCL for the amount equivalent to 10% of the project tariff for the shortfall units to UPCL. The PPAs specify a late payment penalty in case of payments being delayed beyond the due date. UPCL has also established a letter of credit equivalent to the average one month’s billing amount as a payment security mechanism as specified in the PPA. Ind-Ra will continue to monitor the receipt of payments and any consistent significant delays will impact the rating.
Established Sponsor Profile: All the project SPVs are directly owned by EDF EN India (100% subsidiary of EDF Renewables India LLP) and EREN India SARL (100% subsidiary of Total EREN SA) in a 50:50 joint venture (JV). The JV has an operational capacity of 663MW (peak), located in Rajasthan, Uttarakhand and Madhya Pradesh, and an under-construction capacity of about 1,560MWp in India. Ind-Ra takes comfort from the experience of the sponsors in handling similar large-scale solar projects and their financial flexibility.
EDF Renewables is a 100% subsidiary of Electricite de France (EDF; Fitch Ratings Ltd; Issuer Default Rating: ‘BBB+’/Stable), which is 100% owned by the French Government EDF Renewables develops, builds and operates renewable power generation plants in more than 20 countries; it had around 20GW of renewable energy projects, 5.9GW gross under-construction projects, and over 15.5GW in operation and maintenance at end-July 2023.
Total Energies acquired 100% stake in Total Eren, TotalEnergies (TE; Fitch Ratings Ltd; Issuer Default Rating: ‘AA-’/Stable). The deal follows the strategic agreement signed between TE and Total Eren in 2017, which granted TE the right to acquire all of Total Eren after a five-year period. TE’s gross renewable installed capacity was 18GW at end-July 2023 and plans to reach 35GW of gross capacity from renewable sources and storage by 2025.
Liquidity Indicator – Adequate: The liquidity of the projects is adequate, given the moderate average debt service coverage ratio (DSCR) of above 1.25x throughout the loan tenor. In Ind-Ra’s opinion, the structure is resilient to the small amount of stresses applied on the generation levels, operating costs and an increase in the receivable days from the off-taker. The projects maintain two quarter’s debt service reserve (DSR) of about INR200.2 million in the form of fixed deposit (FD), as per the stipulations. Also, as on 31 July 2023, the project had unencumbered cash (excluding DSR and surplus distribution of around INR105 million to its sponsor) of about INR90 million, equivalent to about three months of debt obligations. Thus, Ind-Ra believes Shakumbhari’s adequate liquidity will be able to mitigate moderate cash flow mismatches.
Favourable Debt Structure: The debt is repayable over 16 years in 64 quarterly instalments commencing from June 2021 and ending in March 2037. The structure is exposed to variations in interest rate, which can be reset annually by the lender. The financial documents stipulate a debt service reserve account (DSRA)equivalent to two quarters of debt servicing and the creation of another reserve only in case the actual operating expenditure is lower than the budgeted estimate basis the approved operational budget. Up to 60% of this surplus amount will be utilised for topping up of additional operations and maintenance (O&M) reserve, before making any restricted payments. In addition, all the projects under the pool have a tail period of five years. The pool structure has also made provision for payments to its holding companies after complying with the restricted payment covenants with the permission of the lender. This provides additional comfort to the ratings.
Moderately-to-Strong Counterparty Profile: The projects have been receiving payment at a consistent pace from the off-taker since the commissioning of the plants in March 2017. Ind-Ra considers counterparty risks associated with the projects as moderately low, given UPCL is considered to have a stronger financial profile among other state-owned distribution companies in India.
Low Operating Risk, In-house O&M: The O&M of the projects is being carried out in-house by Eden Renewables India LLP. The projects have signed a contract for their life at a fixed price and an annual escalation. Also, limited technological complexities involved in the O&M of solar projects provide comfort to the ratings. Ind-Ra has considered operating costs as per the historical values in its base case with a fixed annual escalation. Considering operating cost is a key factor for the DSCR, any sustained increase in operating expenses may lead to a rating downgrade.
Minimal Technical Risk: The SPVs use polycrystalline solar photovoltaic modules. The solar equipment supply contract safeguards the projects from product failure through an adequate 10-year product warranty and a 25-year performance warranty. The plants are configured with polycrystalline technology-based solar modules by Jinko Solar Holding Co. Ltd. and Suzhou Talesun Solar Technologies Co. Ltd. The presence of a tier-1 solar panel suppliers and industry standard warranties mitigate the technology risk to a large extent. Ind-Ra’s base case factors in module degradation of 0.7% on an annual basis. Ind-Ra considers technology-related risks of the projects to be minimal as all the equipment suppliers have a proven track record and experience, and have provided warranty for defects as well a minimum output level.
Stable Financial Performance: Shakumbhari’s operating revenue remained stable at INR90.7 million in FY23 (FY22: INR91.5 million). Furthermore, the operating expenses remain in line with its FY22 numbers. According to the audited financial statements of FY23, Shakumbhari does not have any contingent liabilities.
Generation Below P90 Since Commissioning: All the six projects have an operational track record for more than six years. All the plants have been operating at a lower than P90 PLF level since commissioning due to the low irradiation received in Uttarakhand stemming from the state’s geography. As per the management, low irradiation levels have been observed across all solar projects located in the state. In FY23, Shakumbhari reported a plant load factor (PLF) of 17.36%, which is slightly lower compared to 17.52% in FY22. Furthermore, compared to the P90 level, Bhagwanpur’s PLF remained lower by about 14% during FY23. Despite the low PLFs, all the projects under the pool have displayed fairly stable operations since commissioning and moderate debt coverages at current generation levels.
Rating Sensitivities
Negative: Future developments that could, individually or collectively, lead to a rating downgrade are:
- the financial and operational performance of the projects being below Ind-Ra’s base case estimates, leading to the forward-looking average DSCR (consolidated basis) falling and staying below 1.15x on a sustained basis
- an elongation of the receivable period from the off-taker beyond 90 days for a sustained period of time
- a weakening of the obligor-co-obligor structure and/or any transgression from the stipulated structure
- deterioration in the credit profile of the sponsors and/or counterparty
Positive: Future developments that could, individually or collectively, lead to a rating upgrade are:
- financial and operational performance of the projects being in line with Ind-Ra’s base case estimates with the average DSCR (consolidated basis) above 1.30x for a sustained period
- an improvement in credit profile of the counterparty
Company Profile
Shakumbhari is jointly owned by EDF EN India SAS and EREN India SARL in an equal ratio of 50:50. The holding is in the form of common equity shares, CCDs and NCDs. Shakumbhari operates a 10MW solar power plant in Ballupur Village, Haridwar district of Uttarakhand.
