Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AAA/Stable' rating to the non-convertible debentures (NCDs) of Virescent Renewable Energy Trust (VRET).

 

For assigning the provisional rating, CRISIL Ratings has reviewed the draft term sheet shared by VRET. The provisional rating will be converted to a final rating on receipt of signed sanction letter or financing agreements (including debenture trust deed) in line with the structure.

 

The rating reflects healthy revenue visibility stemming from long-term power-purchase agreements (PPAs), healthy generation track record and strong financial risk profile because of low leverage and strong liquidity. These strengths are partially offset by exposure to receivables from state distribution companies (discoms) and to risks inherent in operating renewable assets.

 

VRET is in the process of issuing Rs 1,000 crore NCDs in three tranches: Series A with a three-year tenor, Series B with a five-year tenor and Series C with a seven-year tenor, which is different from earlier planned debt structure of bank loan for a tenor of 17 years. The change in terms of debt structure does not adversely impact VRET’s financial risk profile as the proposed amortisation schedule is broadly in line with that of the repayment schedule during the tenor of NCDs and refinance risk of bullet at end of NCD tenor is expected to be low to moderate on account of strong business risk profile of assets (having long-term PPAs and healthy operational track record) and healthy project life and PPA tenor alleviating bullet refinancing risk.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of all renewable assets, cumulatively adding up to a capacity of 394 MWp (megawatts-peak), which are to move to VRET. This is in line with the CRISIL Ratings criteria for rating entities in homogenous groups. CRISIL Ratings has also combined the business and financial risk profiles of the renewable asset portfolio of 55.5 MWp that is proposed to be acquired by the infrastructure investment trust (InvIT) before December 31, 2021.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Revenue visibility due to long-term PPAs and healthy generation track record

The overall portfolio benefits from diversity in terms of presence across seven states and different locations within these states. This helps reduce generation risk, as reflected in strong plant load factor (PLF) that has consistently exceeded the P90 value at the overall portfolio level in the past; PLF during fiscals 2020 and 2021 was about 17.0% against average P90 of 16.7%. Although generation during April-September 2021 was lower than the corresponding period previous fiscal, this was because of inverter issues in PLG Photovoltaic Pvt Ltd (PLG) and Terralight Solar Energy Charanka Pvt Ltd (TSECPL), transformer issues in one of the projects being acquired and higher-than-expected rainfall; inverter issues in the two SPVs (special-purpose vehicles) have been resolved. Hence, generation is expected to improve and would be broadly in line with the P90 expectation for fiscal 2022, after adjusting for seasonality.

 

Additionally, the sale of power from the portfolio has PPA tie-ups with seven different counterparties. Over 90% of the portfolio has PPAs with a pre-determined tariff for a 25-year tenure, while the tie-up for the remaining capacity is fixed for 12 years. This provides revenue visibility, minimises offtake risk and ensures steady cash flow.

 

VRET plans to grow the portfolio to 1.5-2.0 gigawatt peak with 80-90% solar portfolio by fiscal 2024. This is also expected to strengthen portfolio diversity in terms of location as well as counterparties, with a higher proportion of at least around 55% (by fiscal 2024) comprising central counterparties, and Gujarat Urja Vikas Nigam Ltd (GUVNL) or counterparties similar to it. For the balance 45% too, a health diversity is expected with share of weaker counterparties having a very high receivable period being restricted to 20% (by fiscal 2024).

 

• Strong financial risk profile due to low leverage and healthy liquidity

Financial risk profile is expected to be healthy marked by a low leverage (total debt of up to Rs 1,000 crore on proposed portfolio of about 450 MWp). This results in healthy average debt service coverage ratio (DSCR) over the tenure of debt.

 

Proposed debt facilities have bullet installments at the end of three, five and seven years, respectively. Refinance risk of bullet is expected to be low owing to healthy business and financial risk profiles of the portfolio. Business risk profile is marked by diversity of portfolio (in location and counterparty) and operational track record. Financial risk profile is marked by remaining PPA life of over 18 years (on average) at present, which will stretch beyond bullets. Moreover, binding term sheet for refinancing of each bullet shall be in place at least four months prior to the bullet repayment due for the respective tranche in line with proposed terms. 

 

Financial risk profile is also supported by an upfront cash debt service reserve account (DSRA) covering six months of debt servicing obligations. Upfront additional liquidity for six months in the form of cash or SBLC (standby letter of credit)/bank guarantee (BG) without recourse to the project, or six months working capital at project SPV/InvIT level (funding to the extent of 75%) has also been proposed under the draft terms. Furthermore, additional liquidity of three months will be built if the weighted average receivables period exceeds 12 months.

 

The planned increase in portfolio size is also expected to increase leverage. But the portfolio will benefit from a larger scale of operations and stronger diversity. CRISIL Ratings shall closely monitor the leverage levels, and any material increase in leverage such that it weakens the DSCR against expectation (of staying above average DSCR of 1.7 times at CRISIL Ratings-sensitised projections at P90 PLF), will be a rating sensitivity factor.

 

Weaknesses:

• Exposure to receivables from state discoms

Long-term PPAs with discoms having relatively weak liquidity and payment track record pose a receivables risk. This can be seen in the receivables profile for the Tamil Nadu assets (capacity of 148 MWp), which got stretched to about two years within fiscal 2021. As of September 2021, receivables from Tamil Nadu Generation and Distribution Corporation Ltd (TANGEDCO) reduced to 9-10 months.

 

• Exposure to risks inherent in operating renewable assets

Cash flow of solar projects is sensitive to PLF, which is dependent on solar irradiation that is inherently unpredictable. Solar assets are also vulnerable to annual degradation of the solar panels. This may increase exponentially in the later part of an asset’s life.

Liquidity: Superior

The proposed InvIT is expected to have strong cash flow of around Rs 120 crore in the second half of fiscal 2022 and about Rs 330 crore in fiscal 2023, sufficient to meet debt obligation (as per the proposed terms) of about Rs 63 crore and about Rs 143 crore respectively. The InvIT will have a DSRA equivalent to six months (in the form of cash). It will also have additional liquidity in the form of cash or SBLC/BG without recourse to project cash flow or working capital lines of six months of receivables at the SPV level/InvIT level (funding to the extent of 75%) to mitigate any cash flow mismatch owing to a stretch in receivables from counterparties.

Outlook: Stable

VRET should continue to benefit from sustained performance, long-term PPAs and diversity in projects.

Rating Sensitivity factors

Downward factors

• Increase in leverage leading to decrease in average DSCR over the remaining debt tenure
• Sustained weak operational performance below the weighted average direct current (DC) P90 of 16.5% (fiscal 2022), and/or stretch in receivables
• Delay in improvement in counterparty diversity in favour of central counterparties, GUVNL and other strong counterparties similar to the latter (of at least 55% by fiscal 2024)

Additional disclosures for the provisional rating

The provisional rating is contingent upon occurrence of the following:

• Financing agreements or signed sanction letter in line with terms assessed are executed

 

The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed and confirmations on completion of pending steps within 90 days from the date of issuance of the proposed NCDs.

 

The final rating assigned after conversion shall be consistent with the available documents and completed steps. In case of non-completion of steps or non-receipt of the duly executed transaction documents within the specified timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days in line with its policy on provisional ratings.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending steps/documentation considered while assigning the provisional rating as mentioned above, CRISIL Ratings would not have assigned any rating.

Risks associated with the provisional rating:

A prefix of 'Provisional' to the rating symbol indicates that the rating is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable. In case the documents received and/or completion of steps deviates significantly from expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or a rating/outlook change, depending on the status of progress on a case-to-case basis. In the absence of the pending steps/documentation, the rating on the instrument would not have been assigned ab initio.

 

Additional disclosures in case of provisional ratings for InvIT

• The broad details of the assets that are proposed to be held by the InvIT are detailed below:

 

Solar Edge Power and Energy Pvt Ltd (Solar Edge)

Solar Edge owns and operates a 169 MWp solar project spread across three locations in Maharashtra (two in Beed and one in Jalgaon). For each location, it has entered into PPAs with Solar Energy Corporation of India (SECI), dated February 10, 2017, for 25 years from the date of commercial operations subject to certain conditions in the agreement. The project became fully operational in April 2018.

 

As per Indian Accounting Standards (IND-AS), revenue from operations was Rs 111 crore and net loss was Rs 191 crore for fiscal 2021 (Rs 111 crore and Rs 15 crore, respectively, in fiscal 2020).

 

Terralight Kanji Solar Pvt Ltd (Terralight Kanji; formerly, Shapoorji Pallonji Solar Pvt Ltd) 

Terralight Kanji owns and operates a 36 MWp solar project located in Thiruvannamalai, Tamil Nadu. It has entered into a PPA with TANGEDCO dated September 19, 2015, for 25 years from the date of commercial operation. The project became fully operational in March 2016.

As per IND-AS, revenue from operations was Rs 35 crore and net loss Rs 37 crore in fiscal 2021 (Rs 39 crore and Rs 2 crore, respectively, in fiscal 2020).

 

TN Solar Power-Energy Pvt Ltd (TN Solar)

TN Solar owns and operates a 27.6 MWp project spread across three locations in Tamil Nadu (Virudhunagar, Thoothukudi and Dindigul). It has entered into three PPAs with TANGEDCO for each locations dated March 5, 2015, March 17, 2015, and May 20, 2015, respectively, for 25 years from the date of commercial operation. The project became fully operational in December 2015.

 

As per IND-AS, revenue from operations was Rs 28 crore and net loss Rs 37 crore in fiscal 2021 (Rs 29 crore and a profit after tax [PAT] of Rs 1 crore in fiscal 2020).

 

Universal Mine Developers and Service Providers Pvt Ltd (UMD)

UMD owns and operates a 30 MWp project spread across two locations of Tamil Nadu (Virudhunagar and Thoothukudi). It has entered into PPAs with TANGEDCO for each location dated March 25, 2015, and May 20, 2015, respectively, for 25 years from the date of commercial operations. The project became fully operational in March 2016.

 

As per IND-AS accounting, revenue from operations was Rs 29 crore and net loss Rs 40 crore in fiscal 2021 (Rs 31 crore and Rs 1 crore, respectively, in fiscal 2020).

 

Terralight Rajapalayam Solar Pvt Ltd (Terralight Rajapalayam; project was formerly part of Shapoorji Pallonji Infrastructure Capital Company Pvt Ltd [SPICCPL])

Terralight Rajapalayam owns and operates a 54 MWp solar project in Rajapalayam, Tamil Nadu. The company acquired the solar project from SPICCPL. The PPA between SPICCPL and TANGEDCO dated September 27, 2017, for 25 years from the date of commercial operation was assigned to SP Suryaprakash pursuant to an addendum to the PPA dated October 27, 2020. The project became fully operational in September 2018.

 

The project was acquired by Terralight Rajapalayam from SPICCPL in October 2020. Past financials for Terralight Rajapalayam are not available.

 

As per Indian Generally Accepted Accounting Principles, provisional revenue from operations for the project was Rs 27 crore and provisional net loss Rs 10 crore in fiscal 2021 (Rs 29 crore and Rs 4 crore, respectively, in fiscal 2020). Audited financial details are not available for the standalone project as it was earlier a part of SPICCL, which also included other businesses.

 

PLG

PLG owns and operates a 20 MW DC solar power project at Daisar in Patan district of Gujarat. The company has entered into a supplemental PPA with PLG Power Ltd and GUVNL dated January 6, 2011, pursuant to which it has agreed to take all the rights and obligations under the PPA between PLG Power Ltd and GUVNL dated May 7, 2010, with respect to the 20 MW capacity of the solar power project for 25 years from the date of commercial operation. 10 MW DC became operational on May 31, 2011, and the remaining 10 MW DC on June 30, 2011.

 

As per IND-AS, revenue from operations was Rs 31 crore and net loss Rs 28 crore in fiscal 2021 (Rs 31 crore and profit Rs 4 crore, respectively, in fiscal 2020).

 

Terralight Solar Tinwari Energy Pvt Ltd (TSTEPL)

TSTEPL owns and operates a 5.75 MW DC solar project at Tinwari in Jodhpur district, Rajasthan. It has entered into a PPA with NTPC Vidyut Vyapar Nigam Ltd (NVVN) dated October 15, 2010, for 25 years from the date of commercial operation. The company has started generating electricity subsequent to the placement of assets in service, and the project became fully operational on October 15, 2011.

 

As per IND-AS, revenue from operations was Rs 16 crore and net loss Rs 1 crore in fiscal 2021 (Rs 16 crore and PAT of Rs 0.1 crore, respectively, in fiscal 2020).

 

TSECPL

TSECPL owns and operates a 15 MW DC solar photovoltaic power project located in Charanka Village, in the Patan district of Gujarat. It has entered into a PPA with GUVNL dated May 29, 2010, for 25 years from the date of commercial operation. The project became fully operational with respect to 3 MW DC on June 30, 2011, and the remaining 12 MW DC on December 31, 2011.

 

As per IND AS, revenue from operations was Rs 18 crore and net loss Rs 2 crore in fiscal 2021 (Rs 18 crore and Rs 6 crore, respectively, in fiscal 2020).

 

Universal Saur Urja Pvt Ltd (USUPL)

USUPL owns and operates a 36.98 MW DC (repowering of DC capacity undertaken recently, resulting in revised DC capacity of 36.98 MWp as against 35.21 MWp earlier. This has also resulted in increase in total capacity to about 394 MWp) photovoltaic power project in Kankua Village in Mahoba, Uttar Pradesh. It has entered into a PPA with Uttar Pradesh Power Corporation Ltd dated April 6, 2015, for 12 years from the date of commercial operation. This PPA can be extended for another 13 years on mutually agreed terms and conditions 180 days prior to the expiry of the original term. The project became fully operational on October 06, 2016.

 

As per IND AS, revenue from operations was Rs 49 crore and PAT Rs 15 crore in fiscal 2021 (Rs 47 crore and net loss of Rs 22 crore, respectively, in fiscal 2020).

 

Portfolio proposed to be acquired:

VRET is in the process of acquiring a portfolio of operational solar assets of close to 55.5 MWp at different locations including Mandsaur (Madhya Pradesh), Bhatinda (Punjab) and Jodhpur (Rajasthan), with weighted average vintage (from their respective start of commercial operations) of around six years. The PPAs for these assets are with counterparties such as Madhya Pradesh Power Management Company (23.67 MWp), NVVN (5.5 MWp), Punjab State Power Corporation Ltd (4.2 MWp) and SECI (22.1 MWp).

 

This acquisition is expected to be closed before December 31, 2021 at an enterprise value of around Rs 350 crore. These assets are proposed to be added into VRET before December 31, 2021. Even with addition of these assets, total debt at VRET is expected to be maintained at maximum Rs 1,000 crore.

 

• The proposed capital structure of the InvIT is as below:

Debt in VRET is expected to be restricted to Rs 1,000 crore with the existing assets detailed above.  Additional leverage for future projects, if any, will be such that the average DSCR (at P90 PLF) is 1.7 times or above for the tenure of debt. Any change in this expectation will be a rating sensitivity factor.

 

• CRISIL Ratings has received an undertaking from Virescent Infrastructure Investment Manager Pvt Ltd (VIIMPL) stating that key details (capacity, location, PPA counterparty, tenure, capital structure/aggregate leverage and other key assumptions) of the initial portfolio of the nine assets are in consonance with the details submitted by VIIMPL to SEBI. VIIMPL has also confirmed that proposed business philosophy with respect to any future acquisition is not required to be filed with SEBI. The details of the portfolio of four assets proposed to be acquired by VRET are not required to be filed with SEBI

About VRET/VIIMPL

KKR incorporated an InvIT (known herein as VRET) in fiscal 2021 and the proposed NCDs shall be issued by this trust. VRET is set up in India and would house renewable energy projects (wind and solar power).

 

VIIMPL is a renewable energy platform backed by KKR and set up in India in August 2020. Headquartered in Mumbai, VIIMPL will be acting as an investment manager for VRET.

KKR is a leading global investment firm with about USD 428.9 billion of assets under management as of June 2021.

Key Financial Indicators

Particulars	Unit	2021	2020
Operating income	Rs crore	NA	NA
Adjusted PAT	Rs crore	NA	NA
Adjusted PAT margin	%	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA
Adjusted interest coverage	Times	NA	NA

 *Financial indicators not meaningful because VRET was incorporated in fiscal 2021

Any other information:

CRISIL Ratings has received an undertaking from VIIMPL stating that key details (capacity, location, PPA counterparty, tenure, capital structure/aggregate leverage and other key assumptions) of the initial portfolio of the nine assets are in consonance with the details submitted by VIIMPL to SEBI. VIIMPL has also confirmed that proposed business philosophy with respect to any future acquisition is not required to be filed with SEBI.

Annexure - Details of Instrument(s)

ISIN	Type of instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Non Convertible Debentures^	NA	NA	NA	1000	NA	Provisional CRISIL AAA/Stable

^Yet to be issued

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Solar Edge	Full consolidation	Same business and common management and treasury operations
TN Solar	Full consolidation
UMD	Full consolidation
Terralight Kanji	Full consolidation
Terralight Rajapalayam	Full consolidation
USUPL	Full consolidation
PLG	Full consolidation
TSECPL	Full consolidation
TSTEPL	Full consolidation
Renewable energy portfolio in the process of being acquired (as discussed above)	Full consolidation