Fitch Ratings has affirmed
The Outlook is Stable. The underlying credit profile is assessed at 'bbb'. However, the rating on the notes is capped by
RATING RATIONALE
AGEL RG2 is a restricted group (RG) that is made up of three subsidiaries of
The underlying credit assessment reflects the credit profile of the RG of the three entities that operate solar generation assets across two states in
Noteholders benefit from a standard security package and robust covenants restricting distributions. The debt instrument is partially amortising, with limited refinancing risk at maturity. We assume the notes will be refinanced at maturity, with the refinancing debt to be amortised across the remaining PPA terms.
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. The performance of the projects in the financial year ended
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 debt-service coverage ratio (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 service from sovereign-backed off-takers is insufficient to cover the outstanding debt. The debt has a six-month debt-service reserve.
PEER GROUP
AGEL RG2's 'bbb' underlying credit profile is two notches higher than that of
AGEL RG2 also compares well with
Azure RG1 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 rating determination for AGEL RG2. AGEL RG2 also 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 refinance risk, as 76% of its principal is amortised across 20 years, while the remainder is bullet debt. Azure RG1's debt is partially amortising via scheduled amortisation and a cash sweep and Azure RG2 has bullet repayments at maturity. AGEL RG2 has a rating-case average DSCR of 1.44x, against Azure RG1's 1.43x and Azure RG2's 1.42x. The qualitative strengths of AGEL RG2 and its financial metrics against relevant thresholds support its higher underlying credit assessment.
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
Underlying credit profile could be lowered if average DSCR across the group's PPA terms drops below 1.40x.
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 FY22 generation was 1,313 million units, which was almost at the P90 generation level. Its 200MW plant in the
Plant availability of the AGEL RG2 portfolio for FY22 improved marginally to 99.9% from 99.8%in FY21. AGEL RG2 performed almost at the P90 levels in terms of generation in FY22, which was slightly lower than the FY21 generation levels.
AGEL RG2's receivable position remained healthy as of
FINANCIAL ANALYSIS
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 1.55x, 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 and 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 generates an average annual DSCR of 1.44x, with a minimum of 1.28x under Fitch's rating case. The 'bbb' underlying credit profile on the notes is supported by the average DSCR, which is well above the investment-grade revenue-based weighted-average threshold.
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 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
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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