Fitch Ratings has assigned a 'BB-' rating to the proposed senior unsecured US dollar notes to be issued by India Clean Energy Holdings, a Mauritius-based fully owned subsidiary of ReNew Energy Global Plc, which is the parent of ReNew Power Private Limited (ReNew, BB-/Stable).

The proposed notes' proceeds would be on-lent to ReNew by way of a US-dollar external commercial borrowing (ECB) bond, with a back-to-back structure and cross-default provisions. The rating on the proposed notes reflects that they will be equivalent to ReNew's senior unsecured obligations and therefore, they are rated at the same level as ReNew's Long-Term Foreign-Currency Issuer Default Rating (IDR).

The ECB's tenure is intended to be longer than that of the proposed notes, providing ReNew flexibility to refinance the proposed notes without unwinding the entire structure, should it choose to do so. ReNew intends to use the proceeds from the proposed ECBs for a mix of capex funding and refinancing its existing debt.

Key Rating Drivers

Diversified Portfolio: ReNew's large size and diversified renewable-asset portfolio provide economies of scale and operating leverage, mitigating project concentration risk. The power projects, including those under construction, are diversified by source - wind (50% of capacity), solar (49%) and hydro (1%) - and by geography, which mitigate risks from adverse climatic conditions at any single site. We expect ReNew's wind generation to return to average historical levels in the financial year ending March 2022 (FY22) after falling in FY21 on a weaker wind season, in line with other Indian wind projects.

Price Certainty, Volume Risk: We believe the long-term power purchase agreements (PPAs) for the group's operating assets offer price certainty and long-term cash flow visibility. More than 90% of group capacity is under PPAs with tenors of 20-25 years and the weighted-average operating life of the group's assets is around four years. However, production volume can still vary under the long-term PPAs because it is based on resource availability, which is affected by seasonal and climatic patterns.

Receivables Build-Up to Reverse: We expect ReNew's receivable days to improve to 167 in FY22, assisted by ReNew's increasing exposure to sovereign-owned entities, a rise in receipt of payments from certain utilities since September 2021, and lower monthly billing after the high-wind season from June to September. Receivable days rose to 257 in 1HFY22 (FY21: 254, FY20: 198) on continued payment delays by the utilities amid the Covid-19 pandemic and slow disbursements from the government's liquidity support package.

ReNew's key counterparties - state-owned power-distribution utilities - which account for about 47% of total capacity, including projects under development, have weak credit profiles. The remaining capacity is directed at sovereign-backed entities (47%) and direct sales (6%), which have more timely payment records.

Public Listing Improves Financial Access: We expect ReNew's financial access to improve after its offshore parent, ReNew Energy Global PLC, was listed on the Nasdaq stock exchange in August 2021. ReNew Energy Global raised a primary equity amount of USD610 million as part of its listing, which will help meet the equity funding requirements of its subsidiary's project pipeline under construction.

Deleveraging Underway: Fitch forecasts ReNew's net leverage - defined by net debt/ EBITDA - will improve to around 5.5x by FY23, and further improve to around 4.8x - a key upgrade sensitivity level - over the next 12-18 months from average levels of 6.9x over FY19 to FY21. This reflects our expectations of ReNew's profitability, improvement in receivables and investment plans.

Restricted Groups' Contribution: We deconsolidate ReNew RG II's (US dollar notes: BB/Stable) EBITDA and debt to calculate ReNew's credit metrics. However, its EBITDA includes our forecast of net cash received from ReNew RG II, which is a restricted group of operating subsidiaries owned by ReNew. We do not exclude the EBITDA and debt of ReNew's other restricted groups, as ReNew provides full-tenor guarantees to their debt and their standalone profiles are weaker or on a par with that of ReNew.

Debt-Service Coverage Improves: Fitch monitors the cash flow from operations (CFO)-based debt service coverage ratio (CFO+ interest expense/scheduled project debt amortisations + interest expense) at the holding company level to analyse ReNew's liquidity and structural subordination risk. ReNew has an unrestricted asset portfolio including 485MW of operating wind and solar power assets. We expect the ratio to rise to around 1.5x in FY22 (FY21: 1.1x) with an increase in cash from larger operational capacity and lower debt amortisation after refinancing of part of project-level borrowings with non-amortising US dollar notes.

Currency Risk: The proposed notes and the ECB are in US dollars, while ReNew's operating cash flows are in Indian rupees, resulting in exposure to foreign-exchange (FX) risk. ReNew will mitigate this risk by substantially hedging the ECB's coupon and principal, resulting in the issuing entity not bearing the FX risk.

Derivation Summary

Fitch sees Greenko Energy Holdings (BB/Stable) and Concord New Energy Group Limited (CNE, BB-/Stable) as ReNew's closest peers. Greenko, like ReNew, is one of India's leading power producers, with a focus on renewable energy. Both have total operating capacity in excess of 5GW, although Greenko's is lower than ReNew's.

ReNew's resource risk is lower, with higher exposure of 49% to solar-based projects (Greenko: 28% solar and 9.5% hydro). Its counterparty risk is also lower, with 47% of capacity contracted with sovereign-owned entities and the balance with state-owned distribution companies and direct sales. Greenko's better credit assessment than ReNew is driven by its stronger financial access and a proven track record of deleveraging, which is driven by support from its key shareholder GIC, which enables the company to rely on fresh equity for investments and acquisitions, while using cash generated from operations to deleverage.

CNE has an attributable wind capacity of 2,277MW across multiple projects in China. CNE's feed-in tariffs are stable and its counterparty risk is significantly lower than that of ReNew, as its revenue stream is mostly reliant on State Grid Corporation of China (A+/Stable) and China's Renewable Energy Subsidy Fund. In comparison, ReNew has a larger size - allowing for diversity and granularity across multiple projects - and improved financial access after its parent's Nasdaq listing. Both have similar financial profiles resulting in same overall rating assessment for them.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Plant-load factors to revert to average historical performance or resource assessment studies, after the dip in FY21 on the weak performance of wind assets;

Plant-wise tariff in accordance with respective PPAs;

Average receivable days to decrease to around 167 in FY22 (FY21: 254);

EBITDA margins of 80%-93% for all assets, in line with historical performance or management guidance;

Capex to average around INR87 billion a year from FY23 to FY24 (FY21: INR24 billion);

No dividend payout in the medium term.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Net debt/EBITDA below 4.8x on a sustained basis, provided that there is no significant increase in ReNew's overall business risk profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Operating EBITDA/net interest expense below 1.5x for a sustained period;

CFO-based debt service coverage ratio at the holding company and unrestricted projects at below 1x for a sustained period;

Significant and prolonged deterioration of the receivable position;

Failure to adequately mitigate FX risk.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate 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 four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Liquidity Supported by Market Access: ReNew had cash and cash equivalents of INR63.2 billion as of end-1HFY22, against debt maturities over the following 12 months of around INR67.1 billion, which include short-term borrowings of INR28.6 billion. We expect the company to generate negative free cash flow in the near to medium term because of ongoing capacity additions. However, ReNew has a policy and record of raising equity in advance for its projects and it has adequate access to the domestic bank-loan market.

The USD610 million primary equity raised as part of ReNew Energy Global's listing on Nasdaq also highlights the group's record of raising funds at regular intervals for its growth plans. ReNew has staggered debt maturities, benefiting from a sound mix of debt in the form of amortising project-level loans with tenors between 13 and 23 years and six tranches of US dollar notes totalling USD2.7 billion and maturing between 2022 and 2028.

Issuer Profile

The issuer, India Clean Energy Holdings, is a Mauritius-based fully-owned subsidiary of ReNew Energy Global, which is the majority parent of ReNew, one of India's leading renewable-energy companies.

ESG CONSIDERATIONS

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

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