Fitch Ratings has assigned Adani Green Energy Limited Restricted Group 1's (AGEL RG1) 18-year fully amortising senior secured notes due 2042 a final rating of 'BBB-'.

The Outlook is Stable. AGEL RG1 used the proceeds of the US dollar notes to refinance its five-year bullet USD500 million senior secured notes due 2024.

The notes are issued in part by each of the three SPVs in the restricted group (RG) - Parampujya Solar Energy Private Limited, Prayatna Developer Private Limited and Adani Green Energy (UP) Limited. All three RG entities are 100%-owned subsidiaries of Adani Green Energy Twenty-Three Limited, which is a 50-50 joint venture between AGEL and TotalEnergies Renewables Singapore Pte Ltd. The notes are stapled together to mimic the structure of the restricted pool. The issuers directly own operating assets and are not lenders to the operating entities, unlike other rated issuance from most Indian RGs. All covenants or triggers are on an aggregate basis.

Each SPV guarantees the note obligations of the other two SPVs, but the notes constitute each issuer's obligations only on a several basis. The noteholders benefit from a standard security package that includes assets, a pledge of the RG's shares and an assignment of key project documents. The RG generates an average annual debt service coverage ratio (DSCR) of 1.39x, with a minimum of 1.29x, under Fitch's rating case, which is commensurate with a 'BBB-' rating.

Fitch believes the risks of any adverse impact on AGEL RG1's funding access and cost amid the investigation into allegations of governance issues at the Adani group have eased after the Indian Supreme Court's judgement in January 2024. The court said the case does not warrant a transfer of investigation from the regulator, the Securities and Exchange Board of India (SEBI), and has found no regulatory failure attributable to SEBI. The group also demonstrated sound access to both the domestic and international debt market over the last six months. Furthermore, we expect AGEL RG1's noteholders to benefit from a legal ring-fencing structure, cash flow waterfall mechanism and covenants that restrict cash upstreaming to shareholders and limit indebtedness.

RATING RATIONALE

The rating reflects the post-refinancing credit profile of AGEL RG1, which operates solar generation assets across India with a combined capacity of 930MW. The rating is underpinned by long-term fixed-price power purchase agreements (PPAs), commercially proven technology with a pure solar portfolio, experienced operations and maintenance (O&M) contractors, adequate financial profile and fully amortising debt structure eliminating the refinancing risk. Noteholders benefit from a standard security package and covenants restricting distributions.

We regard revenue from sovereign-backed NTPC Limited (BBB-/Stable) and Solar Energy Corporation of India (SECI) as fully contracted revenue and apply the fully contracted project threshold. AGEL RG1 contracts 57% of its total capacity to NTPC and SECI. The credit quality of SECI does not constrain the rating, as revenue exposure to SECI presents a systemic sector risk.

We do not rate the state-owned distribution companies that purchase power from some of the RG's projects. The counterparties have weak credit profiles and varying history of payment delays, although exposure to multiple counterparties mitigates the risk. Furthermore, receivables collection from state-owned distribution companies improved following the introduction of the late payment surcharge rule in 2022. We believe it is prudent for such projects to meet a higher threshold to achieve the same rating as other projects with strong counterparties, all else being equal.

Hence, we regard revenue from state-owned distribution companies as merchant revenue and apply the merchant project threshold. Cash flow is evaluated using contracted prices.

KEY RATING DRIVERS

Experienced Contractors; Proven Technology: Operation Risk -- Midrange

AGEL RG1 consists of 930MW polycrystalline solar projects, a proven technology with a long operating history. Fitch views the operation of this kind of solar projects as straightforward. Solar modules are provided by internationally well-known suppliers. An affiliate, Adani Infrastructure Management Services Limited, carries out O&M under seven-year fixed-price contracts with 2% annual price increase, although contract prices have been lowered in the past. The operation risk assessment is constrained to 'Midrange' because the operating cost forecast is not validated by an independent technical advisor.

Operating History Above Revised P90 Estimates: Revenue Risk (Volume) - Midrange

AGEL RG1's portfolio of assets commenced operations in 2017-2018, except for a 50MW project commissioned in 2019. The portfolio was underperforming its initial P90 forecasts, which were revised down in 2022 to take into account actual operating performance. The portfolio has marginally outperformed the revised P90 forecasts during its operational history. An overall P50/one-year P90 spread of 8% leads to a 'Midrange' volume risk assessment.

Generation in the financial year ended March 2023 (FY23) was in line with the P90 forecast at 1,895 million units and that in 1HFY24 was in line with the P50 forecast. The RG's grid and plant availability in FY23 was 99.0%, and 99.4% and 99.2% in 1HFY24, respectively.

Long-Term Fixed-Price PPAs: Revenue Risk (Price) -- Stronger

AGEL RG1 contracts 40% of its total capacity with NTPC and 17% with SECI, with the remaining capacity contracted with various state distribution companies under 25-year fixed-price PPAs, which protect the portfolio from merchant price volatility. We assess price risk as 'Stronger'.

Fully Amortizing with Protective Structural Features: Debt Structure - Stronger

The notes refinance the five-year bullet US dollar notes. The notes' long tenor fully amortising structure eliminates the refinancing risk during the RG portfolio's life. The noteholders benefit from protective structural features restricting distributions. All cash will be trapped and swept if the 12-month backward-looking DSCR drops to below 1.35x or the project life cover ratio drops below 1.6x.

Distribution will also be restricted if the EBITDA mix from sovereign-backed off-takers declines to less than 55%, or if aggregate cash flow available for debt servicing from sovereign-backed off-takers over the remaining PPA terms is insufficient to cover 75% of the outstanding debt. The debt has a six-month debt-service reserve.

Financial Profile

Fitch's base case assumes a P50 energy production until the maturity of the notes, a 5% production haircut and repowering capex to arrest 0.5% annual degradation. We assume a flat cost of modules, required for repowering capex. We also apply a four-month stress to the receivable day assumption for state-owned distribution company off-takers. Fitch's base case generates an average DSCR of 1.50x, with a minimum of 1.42x.

Fitch's rating case assumes a one-year P90 energy yield throughout the tenor of the notes, a 5% production haircut and repowering capex to arrest 0.6% annual degradation. We assume a 1% annual increase in cost of modules, which are required for repowering capex. We also apply a 10% stress on the operating expense and a four-month stress to the receivable-day assumption for state distribution company off-takers. Fitch's rating case generates an average annual DSCR of 1.39x, with a minimum of 1.29x.

PEER GROUP

AGEL RG1's notes resemble Adani Green Energy Limited Restricted Group 2's (AGEL RG2, note rating: BBB-/Stable). Both are long-dated notes, but AGEL RG1's notes are fully amortising, while AGEL RG2's are largely amortising notes with 24% balloon repayment at maturity. However, AGEL RG2 benefits from higher contributions from capacity contracted with sovereign-owned entities (61%) than AGEL RG1 (57%). In addition, AGEL RG2 has a better financial profile with a rating case DSCR of 1.44x versus AGEL RG1's 1.39x.

AGEL RG1's notes have a marginally lower financial profile than AGEL RG2's notes, but they have mitigated refinancing risk entirely, justifying a similar credit profile to AGEL RG2's notes.

AGEL RG1's notes can be also compared with those of Continuum Energy Levanter Pte. Ltd. (Continuum RG1, note rating: BB+/Stable). AGEL RG1 is a pure solar portfolio, while Continuum RG1's wind resources make up 89% of portfolio assets. Higher wind and merchant components result in Continuum RG1's much higher rating-case DSCR of 1.66x. Furthermore, Continuum RG1 has partial debt amortisation and cash sweep in the bond document, which will result in 53% of the senior notes' principal being refinanced.

In contrast, AGEL RG1's notes have a fully amortising structure and tighter issuing structure, with direct issuance by the operating entities instead of Continuum RG1's two-tier structure, supporting a one-notch difference in the note ratings.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Average annual DSCR during the notes' tenor drops to below 1.35x persistently;

Lowering of India's 'BBB-' Country Ceiling to 'BB+'.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Positive rating action appears unlikely, given our expectation of limited improvement in the financial profile.

TRANSACTION SUMMARY

AGEL RG1 consists of three SPVs under Adani Green Energy Limited, with total capacity of 930MW across India. The US dollar notes are issued in part by each of the three SPVs in the RG. The notes are stapled together to mimic the structure of the restricted pool. The issuers directly own operating assets and are not merely lenders to the operating entities, unlike other rated issuance from most Indian RGs. All covenants or triggers are on an aggregate basis. Each SPV guarantees the note obligations of the other two SPVs, although the notes constitute each issuer's obligations only on a several basis.

SECURITY

The US dollar notes have security and protective structural features similar to refinanced bullet notes including:

Pledge over 100% shares of each of the SPV issuers;

First-ranking mortgage over all immovable assets in respect of each project of each issuer;

First-ranking mortgage over all fixed and current assets and receivables in respect of each project of each issuer;

Charge/assignment of rights under all PPAs and other key project documents.

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.

ESG Considerations

AGEL RG1 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 RG1 has an ESG Relevance Score of '4' for Group Structure due to the concentration of ownership, with a large stake indirectly held by Adani Group, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire