Fitch Assigns SAEL's Proposed Notes First-Time BB(EXP) Rating with Stable Outlook

Fitch Ratings - Singapore: Fitch Ratings has assigned SAEL RG1's proposed US-dollar senior secured notes due 2029 an expected rating of 'BB(EXP)'. The Outlook is Stable. SAEL RG1 is a restricted group of solar and biomass projects owned by India-based SAEL Limited.

The final rating is contingent upon the proposed reorganisation of the group and the receipt of final bond documents conforming to information already received.

RATING RATIONALE

The expected rating reflects the credit strengths and weaknesses of a restructured SAEL Limited and five of its operating subsidiaries, which contain 13 solar and biomass assets with a total capacity of 281MW as well as a warehousing business. SAEL's commodities business, module assembly plant and other solar and biomass projects will be removed from SAEL Limited and injected into other unrestricted subsidiaries. All the unrestricted businesses and subsidiaries will not have any recourse to SAEL, but will have direct recourse to the new ultimate parent.

The expected rating is supported by limited volume and price risk as well as low fuel-supply risk for biomass projects. The restricted group will repay about 52% of the total bond value during the proposed bond's tenor. However, the majority of repayments are planned through mandatory cash sweeps and not actual amortisation. The expected rating is constrained by a high reliance on mandatory cash sweeps along with a low project-life cover ratio of 1.17x. In addition, the four biomass projects contribute almost half of the cash operating profit. Our rating case results in an average debt service coverage ratio (DSCR) of 1.61x over the proposed bond's tenor.

KEY RATING DRIVERS

Tight Forecast Spread, Limited Record, No Take-or-Pay - Revenue Risk (Volume): Midrange

The energy yield forecast produced by a third-party expert for each solar asset indicates an overall one-year P90/P50 spread of about 4%, which we assess as 'Stronger'. However, our overall assessment is constrained by the limited record of most of the solar assets in the portfolio, with two projects with a total capacity of 47MW planned to commence operations in a couple of months. We expect limited curtailment risk for the solar assets given the must-run legal status.

The technology supplier for the biomass projects has guaranteed availability of 91.3%. However, unlike other thermal projects, there are no take-or-pay arrangements for SAEL's biomass assets. Nevertheless, we expect limited curtailment risk, as these assets have a must-run status, operate as base load, support the renewable-power purchase obligations of distribution companies and help contain pollution. Combined, we assess overall volume risk as 'Midrange'.

Fixed Long-Term Prices for Most Contracts - Revenue Risk (Price): Midrange

Revenue for most of the solar portfolio is earned under long-term, fixed-price power purchase agreements (PPAs). SAEL receives a fixed price for Project 1, which represents 50MW of its 221MW solar capacity, until March 2030, after which remuneration will be based on the average power-purchase cost of its counterparty. Tariffs for the three biomass projects are fixed for 13-15 years from commercial operations and will thereafter be reassessed by the respective state regulator for the balance useful life of the assets. We assess overall price risk as 'Midrange'.

Reasonable Supply, Short-Term Contracts - Supply Risk: Midrange

The assets are located in paddy-rich states of India where the majority of paddy straw is burnt in the fields. SAEL RG1's supply is de-risked from the underlying crop and the company has an established supply chain, which is a significant barrier to entry for competitors. The supply contracts offer fixed prices with certain annual escalation, but the tenor is short. SAEL RG1's fuel supplier is one of many small traders. There are no delivery liquidated damages in the contracts or reserves to cover PPA deductions or operating costs. Hence, our overall assessment is constrained to 'Midrange'.

Proven Technology, Affiliated Contractor, Invalidated cost - Operation Risk: Midrange

SAEL RG1's total capacity of 281MW comprises 78% (221MW) solar projects and 22% (60MW) biomass power assets. We consider the technology deployed in these projects as proven. Solar modules and equipment for biomass projects are sourced from internationally well-known suppliers. Operation and maintenance (O&M) is carried out by an affiliate company under longer term fixed-price contracts. However, our assessment is constrained to 'Midrange', as the operating cost forecast is not validated by an independent advisor and there is no reserving mechanism for maintenance costs.

Partially Amortising Debt, Refinancing Risk - Debt Structure: Midrange

The proposed bond will be jointly and severally guaranteed by SAEL and its five other operating subsidiaries. The co-issuers will use the proposed bond proceeds to refinance existing debt and to fund pending capex within the restricted group. About 52% of the proposed bond will be repaid during its tenor through a mix of mandatory cash sweeps (39% of total repayment during the bond tenor) and scheduled amortisation (13%).

Bond holders will benefit from protective structural features, including complete lockup of operating cash and restrictions on permitted indebtedness. The restricted group will also maintain a six-month debt service reserve account. However, there will not be any maintenance reserve account. Refinancing risk is mitigated by partial repayment during the proposed bond's tenor, the remaining tenor of the PPAs and the group's access to domestic banks. The issuer plans to substantially hedge foreign-exchange exposure.

PEER GROUP

SAEL RG1 can be compared with Clean Renewable Power (Mauritius) Pte. Ltd (CRP, senior secured: BB-/Stable) and India Cleantech Energy (senior secured: BB-/Stable, underlying credit profile: bb).

The CRP restricted group of solar and wind assets has a total capacity of 505MW; 54% solar and 46% wind. It also has stronger counterparty exposure than SAEL, with 46% of capacity contracted with sovereign-owned entities, against SAEL RG1's 7%. CRP will also repay about 30% of its total debt during the bond tenor, with 27% through cash sweeps and the balance through actual amortisation, but SAEL RG1's credit assessment is more sensitive as it has a greater reliance on cash sweep payments. Nevertheless, SAEL RG1's strong rating case DSCR of 1.61x, versus CRP's 1.26x, counteracts these weaknesses and justifies a notch higher rating.

India Cleantech Energy's restricted group, Acme RG1, comprises pure solar assets with total capacity of 450MW. Acme RG1 has stronger resource and superior counterparty exposure, with 55% of capacity contracted with sovereign-owned entities. Acme RG1 will repay about 26% of its total debt during the bond tenor, with 19% coming from cash sweeps and the balance through actual amortisation. SAEL RG1's credit assessment is more sensitive to cash sweep payments due to its greater reliance on this form of repayment. Combined, we rate SAEL RG1 at the same level as Acme RG1's underlying credit profile, despite its stronger rating case DSCR of 1.61x versus Acme RG1's 1.32x. Acme is rated a notch lower than its underlying credit profile to reflect risk of orphan SPV issuance.

RATING SENSITIVITIES

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

- Average annual rating case DSCR persistently below 1.56x

- Unfavourable regulatory outcome on tariff determination of biomass projects

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

- Average annual rating case DSCR persistently above 1.67x

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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. 

TRANSACTION SUMMARY

As part of the group's restructuring, agri business, module assembly plant and certain power projects will move out of SAEL and will be housed in separate SPVs. SAEL will be left with eight power projects -projects 1, 2, 3, 4, 9, 11, 12 and 16 - and a warehousing business. A new holding company will be created and will own the majority of SAEL. The promoter's ownership will be transferred to the new holding company through share swaps. All businesses outside of SAEL, aside from the constituents of the proposed restricted group, will have direct recourse to only the new holding company, not SAEL.

Proceeds of the proposed US-dollar notes will be used by the co-issuers to repay existing debt, including the prepayment of penalties to existing lenders, for capital expenditure, to extend inter-company loans to group entities and for other uses as permitted by the central bank's guidelines for external commercial borrowings.

Cash equivalent to at least 1.1x of the remaining estimated project cost will be trapped upfront from the proposed bond proceeds in a designated account for the construction and capital expenditure of two solar and one waste-to-energy project. The balance will be released after the projects achieve commercial operations and receive the first payment from off-takers.

FINANCIAL ANALYSIS

Our base case assumes P50 generation, a 5% production haircut and 0.7% annual degradation for solar assets. For the biomass projects, we assume a heat rate varying from 1.1 tonnes/MWh to 1.4 tonnes/MWh and a load factor in around 80%-88%. Our O&M cost assumption is in line with the company.

Our rating case assumes 1-year P90 generation, a 5% production haircut and 0.7% annual degradation for solar assets. For the various biomass projects, we assume a heat rate varying from 1.2 tonnes/MWh to 1.5 tonnes/MWh and a load factor that is 5% lower than the base case. Our O&M cost assumption is 10% higher for the solar assets and 20% higher for the biomass projects.

In both cases, we assume contracted tariffs for projects with long-term PPAs. For Project 1, we assume a tariff of INR3/kWh once the PPA expires. For the biomass projects, we assume a 50% decline in the tariff once the tariff period expires. We also assume that the outstanding US-dollar bond at maturity will be refinanced by new debt that will amortise across the remaining PPA terms or the projects' useful lives, whichever is longer. Our refinance rate assumption is around 11%. We focus on the conservative average annual DSCR, be it over the bond tenor or during the refinancing period. The reliance on cash sweeps for repayments is credit negative compared with full amortisation, as balloon repayment on maturity may vary.

Our average DSCR in the base case is 1.81x during the bond tenor. Our rating case results in an average annual DSCR of 1.61x during the bond tenor.

SECURITY

The primary obligation of each co-issuer in respect of the proposed US-dollar notes will be secured by:

- Pari-passu charge over the immovable, movable and current assets and receivables of the co-issuers, except land attributable to agriculture and the warehousing business

- assignment of or charge over rights under the project documents and insurance policies of the co-issuers

- first ranking pledge of 100% of shares of each co-issuer

- exclusive charge over the cash trap account, which will be created to park the payment required for pending capex, and the debt service reserve account

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

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.