Fitch Ratings has revised the Outlook on India-based ReNew Power Private Limited’s long-term issuer default rating to Positive from Stable and affirmed the ‘BB’ rating. At the same time, the agency has affirmed the ratings on ReNew’s outstanding senior secured US dollar notes at ‘BB-‘.
The outlook revision reflects ReNew’s deleveraging potential following its announcement it has raised USD610 million from a primary equity sale as part of its public listing plans. We forecast its net leverage, measured as net debt/EBITDA, to reach around 4.8x over the next 18-24 months. The proposed Nasdaq listing should help widen ReNew’s equity access and strengthen corporate governance standards over the medium term.
The affirmation reflects ReNew’s large-scale and diversified portfolio as one of India’s leading renewable-energy independent power producers with a total operating capacity of 5.4GW and 4.5GW of capacity under development. We expect ReNew’s operating portfolio to reach around 8GW in the next 24 months. We believe the increasing scale will help improve ReNew’s business profile with increasing exposure to central counterparties and a larger proportion of relatively stable solar assets. Fitch has raised its upgrade sensitivity on net debt to EBITDA to 4.8x, from 4.5x previously, reflecting our expectation of its improving business profile.
Key rating drivers
Listing to Drive Profile Improvement: ReNew expects to use fresh equity funds for its capex, lowering the company’s incremental borrowing requirements. We expect this would reduce ReNew’s net leverage to around 4.8x in the year ending March 2022 (FY22) from 6.9x expected in FY21 (FY20: 7.1x) and improve its EBITDA net interest expense coverage ratio to 2.0x in FY22 from 1.4x expected in FY21 (FY20:1.3x). Increasing EBITDA from under-construction capacity becoming operational will also support deleveraging.
The company expects total proceeds of USD1.2 billion from this listing via a business combination with RMGAcquisition Corporation II (RMG II). This is subject to attaining the requisite approvals, including RMG II shareholders’ approval, which according to the company do not involve any market risks. RMG shareholders have the option to redeem their investment at par but any redemptions would not impact the net primary equity amount of USD610 million to be received by ReNew.
Restricted Groups’ contribution: We have deconsolidated ReNew RG II’s (US dollar notes rated: BB) EBITDA and debt to calculate ReNew’s credit metrics, but its EBITDA includes our expectations of net cash received from ReNew RG II. We do not exclude the EBITDA and debt of other restricted groups, India Green Power Holdings (BB-(EXP)/Stable) and ReNew Power Private Limited Restricted Group 3 (BB-/Stable), considering their full tenor guarantees provided by ReNew and their standalone assessment being weaker or on par with that of ReNew.
Capex to rely on PPAs: We believe ReNew’s capex will rise to INR67 billion in FY22 (FY21: INR32 billion) short of its INR100 billion target, and fall to around INR54 billion in FY23, below a INR84 billion target. The remaining capex for its construction pipeline may be pushed back to FY24. Fitch expects lower capex as power-purchase agreements (PPAs) for around 50% of ReNew’s projects under development have yet to be signed, which we believe will delay the commissioning for these projects by 6-12 months from the company’s target completion dates.
Weak counterparty profile: 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 rest is tied up with sovereign-backed entities (48%) and direct corporate customers (5%), which have more timely payment records. ReNew’s exposure to sovereign-backed entities should rise to 48%, from around 18% currently, over the next two-three years as they account for over 90% of its under-development projects.
We expect the group’s receivable days to rise to around 242 in FY21 (FY20: 198 days) due to payment delays by utilities during the Covid-19 pandemic. However, we expect receivable days to decrease to around 181 in FY22 amid the disbursements from the government’s INR1.2 trillion liquidity support package.
Leading producer: ReNew’s large size and diversified renewable-asset portfolio provide economies of scale and operating leverage, mitigating concentration risk. The power projects, including its under-construction pipeline, diversity by type – wind (51%) and solar (49%) – and geography mitigate risks from adverse climatic conditions. ReNew’s solar assets performed in line with our estimates in 1HFY21, but wind-based generation suffered due to a weaker wind season.
Price certainty, volume risk: We believe the long-term PPAs for the group’s operating assets offer price certainty and long-term cash-flow visibility. The majority of assets – more than 90% of group capacity – have PPAs with tenors of around 20-25 years and the weighted-average operating life of the group’s assets is around four years. The long-term PPAs provide protection from price risk, but production volume varies, as it is based on resource availability, which is affected by seasonal and climatic patterns.
Debt-service coverage improves: Fitch monitors the CFO-based debt-service coverage ratio (CFO+ interest expense/scheduled project debt amortisations + interest expense) at the holding company and unrestricted projects to analyse liquidity and the unrestricted portfolio. We expect the ratio to rise to around 1.6x in FY22 (FY21: 1.2x) with an increase in cash from larger operational capacity and improving receivables. Debt amortisation should also drop after refinancing of part of project-level borrowings with non-amortising US dollar notes.
No notching for subordination: Fitch does not notch down the US dollar note rating, as we expect at least average recovery for noteholders due to the large scale and project diversity across geographies, resource types and counterparties. The rating factors in the subordination of notes to other secured debt at ReNew’s holding company. Higher prior-ranking debt may raise subordination, leading to a reassessment by Fitch.
Hedging; refinancing risk: ReNew’s earnings are in Indian rupees, but its notes are in US dollars, resulting in exposure to foreign-exchange risk. ReNew has mitigated this risk by substantially hedging the notes’ coupon and principal. The US dollar notes face refinancing risk, as we estimate the cash balance at ReNew will be insufficient to repay the notes at maturity. However, this is mitigated by ReNew’s proven access to debt and equity funding.
Derivation summary
Fitch regards Greenko Energy Holdings (BB/Stable) and Concord New Energy Group Limited (CNE, BB-/Negative) as ReNew’s close 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 slightly lower than that of ReNew.
ReNew’s resource risk is lower, with higher exposure of 49% to solar-based projects (Greenko: 27% solar and 11% hydro). Its counterparty risk is also lower, with 48% capacity contracted with sovereign-owned entities and the balance with state-owned distribution companies. Greenko’s better credit assessment than ReNew’s is supported by its stronger financial access, which enables the company to rely on fresh equity for investments and acquisitions, while utilising cash generated from operations to deleverage. The Positive Outlook on ReNew reflects our expectations of improvement in its financial profile with net leverage falling to around 4.8x over the next 18-24 months. ReNew’s lower leverage than that of Greenko reduces the difference in the two companies’ overall credit assessment.
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. ReNew has higher counterparty risk, with exposure to weak Indian state-owned distribution companies, but CNE also suffers from delayed subsidy collections. Divergence in the Outlook of the two ratings is driven by CNE’s reliance on funding through asset sales and lower liquidity, while ReNew’s proposed Nasdaq listing would improve its financial access and reduce its projected net leverage to around 1x lower than that of CNE.
ReNew RG II is a restricted group with total capacity of 636MW across 11 renewable projects in India and no construction risk. ReNew RG II’s fuel mix is comparable with that of Renew, with 56% of capacity from solar and the rest from wind. ReNew RG II has a tighter transaction structure and slightly better average credit metrics over the life of its bond. Our expectation of ReNew’s lower leverage and improving financial access reduces the variance in the overall credit assessment between the two.
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 due to the weak performance of wind assets
– Plant-wise tariff in accordance with respective PPAs
– Average receivable days to increase to 242 in FY21 (FY20: 198 days), before falling to 181 in FY22
– EBITDA margins of 80%-93% for all assets, in line with historical performance or management guidance
– Capex to average around INR60 billion per annum from FY22 to FY24 (FY21: INR32 billion)
– Inflow of USD610 million through primary equity sale in FY22 to be used for capex or debt reduction
– No dividend payout in the medium term
