Fitch Ratings has affirmed Adani Green Energy Limited Restricted Group 2's (AGEL RG2) USD362.5 million senior secured, partially amortising notes due 2039 at 'BBB-'.

The Outlook is Stable. The underlying credit profile is assessed at 'bbb'. However, the rating on the notes is capped by India's Country Ceiling of 'BBB-'.

RATING RATIONALE

AGEL RG2 is a restricted group (RG) that is made up of three subsidiaries of India-based Adani Green Energy Limited (AGEL). 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 a 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.

The underlying credit assessment reflects the credit profile of the RG of the three entities that operate solar generation assets across two states in India with a combined capacity of 570MW. The notes' underlying credit profile is underpinned by long-term fixed-price power purchase agreements (PPAs), commercially proven technology and experienced operations and maintenance contractors, and weighed down by the entities' limited operating record.

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, Adani Infrastructure Management Services Limited, under a seven-year contract. Replacement operators are readily available in the market. The operation risk assessment is constrained to 'Midrange' as the operating cost forecast is not validated by an independent technical advisor.

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 March 2022 (FY22) has been largely in line with their P90 forecasts. Curtailment risk is limited because of the 'must-run' status of renewable energy plants in India. The curtailment at the Nalawar plant in FY22 was due to grid constraint, which AGEL RG2 said has improved after the augmentation of evacuation infrastructure.

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

AGEL RG2 contracts 61% of its total capacity with sovereign-backed Solar Energy Corporation of India (SECI) and the remaining capacity to Maharashtra State Electricity Distribution Company and Bangalore Electricity Supply Company under 25-year fixed-price PPAs. The PPAs protect the portfolio from merchant price volatility, resulting in our 'Stronger' price risk assessment.

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 Adani Green Energy Limited Restricted Group 1 (AGEL RG1, note rating: BB+/Stable). AGEL RG2 has a much tighter structure with largely amortising and longer-dated debt, higher contribution from capacity contracted with sovereign-owned entities (61%) than AGEL RG1 (57%), with a rating-case DSCR of 1.44x, compared with AGEL RG1's 1.37x.

AGEL RG2 also compares well with Azure Power Energy Ltd's RG of 16 entities (Azure RG1, senior secured notes: BB+/Rating Watch Negative (RWN)) and Azure Power Solar Energy Private Limited's RG of 10 entities (Azure RG2, senior secured notes: BB/RWN). All three RGs are solar-only portfolios and benefit from long-term fixed-price PPAs and proven technology. They also have limited operating records and operating-cost forecasts that lack independent validation.

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 India's Country Ceiling to 'BB+';

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 India's Country Ceiling of 'BBB-'.

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. 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.

TRANSACTION SUMMARY

AGEL RG2 is an RG consisting of three SPVs under AGEL with total capacity of 570MW in Karnataka and Rajasthan. AGEL RG2 has contracted 61% of its capacity with SECI and the remaining capacity with unrated state distribution companies. The solar plants have been operating for almost three years.

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 state of Rajasthan outperformed the P90 level in FY22 due to higher irradiation, but the remaining projects in the state of Karnataka, with total capacity of 370MW, underperformed the P90 level due to lower irradiation, according to management.

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 June 2022, with about 99% of total receivables under 0-60 days. The Nalwar 40MW plant in the state of Karnataka was facing curtailment in FY22 due to infrastructure issues. However, management confirmed that the issue has been resolved.

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 India's Country Ceiling of 'BBB-'.

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

(C) 2022 Electronic News Publishing, source ENP Newswire