Fitch Rates Greenko's Proposed USD Notes 'B+(EXP)'

​Fitch Ratings: Fitch Ratings has assigned Greenko Investment Company's (GIL) proposed US dollar senior notes an expected rating of 'B+(EXP)', with Recovery Rating of 'RR4'. The notes are guaranteed by Greenko Energy Holdings (GEH, B+/Stable).

GIL is a subsidiary of GEH, which is involved in hydro and wind power generation in India. GEH has about 1GW of operational capacity and another 1GW under construction and development. GIL plans to use the proceeds from the proposed notes to refinance existing debt at operating entities within a restricted group of companies that is defined in the indenture to the proposed note issue. The operating entities plan to issue secured Indian rupee-denominated bonds to GIL as part of this debt refinancing.

KEY RATING DRIVERS

Guarantee Supports the Rating: The expected rating assigned to the proposed notes reflect the guarantee from GEH, which is the ultimate holding company of the group's assets, including those included in the restricted group of companies backing the proposed notes to be issued by GIL. This is because assets in the GIL-restricted group have a very short operating history or are near completion, and the forecast credit metrics for the restricted group in the next 12 to 18 months will be weaker than that appropriate for a 'B+' rating.

Structural Enhancements to Notes: Similar to the group's USD550m notes issued by Greenko Dutch B.V. (GBV) in 2014, the proposed notes benefit from a number of structural enhancements created through the notes indenture. These enhancements provide additional protection to note holders via restrictions and limitations on use of cash and investments at the restricted group level. Furthermore, note holders benefit from access to cash generation and assets of the restricted group through the rupee-denominated notes, via which the proceeds of the US dollar notes would be on-lent to the asset owners of the restricted group. The rupee-denominated notes would have a first charge on all assets, except accounts receivables, of the restricted group.

Indirectly, the note holders also benefit from the absence of any prior-ranking debt in the restricted group, aside from a working capital debt facility of a maximum of USD30m, which is secured against accounts receivable. The proposed notes will not benefit from an interest reserve account, unlike the GBV transaction, which benefits from a reserve account funded to cover a semi-annual coupon payment. GEH's guarantee also benefits note holders as the assets of the restricted group are not effectively owned by GIL.

Diversified Operations, Unseasoned Portfolio: The restricted group had an operating capacity of 297MW as at March 2016, with another 106MW of hydro capacity expected to commence operations by August 2016. The assets of the restricted group are diversified by type and location, which mitigates risks from adverse wind patterns or monsoon conditions. The wind assets are spread across three states in India, though wind patterns across larger geographic areas tend to be correlated. The company operates a 23MW glacier-fed hydro power plant in Uttarakhand and is constructing two others in Sikkim (96MW glacier-fed) and Karnataka (10MW monsoon-fed). The limited maturity of the restricted group's assets - they have been in operation for only 5-15 months - remains a credit weakness, although the company has conducted detailed wind studies for its projects.

Price Certainty, but Volume Risks: Long-term power purchase agreements (PPAs) for all of the restricted group's operating wind and hydro assets, with tenors of 25-35 years in case of contracts with state utilities and 10-13 years for direct sales, support the credit profile of the restricted group. Although the long-term PPAs provide protection from price risk, production volume will vary with wind and hydro patterns despite the diversification of the assets.

Weak Counterparty Profile: The weak credit profiles of the restricted group's customers constrain the rating. The state-owned utilities of Rajasthan and Andhra Pradesh have weaker financial profiles than those of Uttarakhand and Sikkim, with all four collectively off-taking about 64% of the total capacity. Further, GIL has also diversified its customers to include private companies - mostly across IT business parks in Karnataka. The spread of customers, with no single customer accounting for more than 30% of its total capacity, mitigates the counterparty risks. GIL has the ability to terminate PPAs if payments are delayed, which may give it the ability to switch customers. However, this still exposes the restricted group to temporary loss of revenues and working capital pressures while it negotiates new agreements.

Financial Performance to Improve: Fitch expects the GIL-restricted group's financial performance to benefit from improved operating conditions as the impact of El Nino on wind patterns and monsoons subsides, as existing assets chalk up a full year of operations and assets under construction come into operation. The agency expects financial leverage (as measured by total adjusted debt/operating EBITDA) of the restricted group to improve to around 5x by the end of the financial year 31 March 2018 (FY18), compared with 6.7x in FY17E, and EBITDA interest coverage to improve to between 1.5x to 2.0x. We expect more assets to be added to the restricted group under GIL over time, subject to terms and conditions in the bond indenture, including debt to EBITDA incurrence tests.

Forex Risks Hedged: The restricted group's earnings are in Indian rupees, but the notes are denominated in US dollars, giving rise to foreign-exchange risk. However, GIL plans to hedge the entire principal and semi-annual coupon payments of its proposed US dollar notes.

GEH's Credit Profile: GEH will place 403MW of assets under the GIL-restricted group and another 623MW are placed under the GBV-restricted group. GEH will continue to have some operational assets outside of the two restricted groups, but its credit risk profile is elevated by construction risks as well as structural subordination of cash flows of operational assets with prior ranking debt, such as those at the two restricted groups. However, asset construction and execution risks in our view are mitigated by group's established track record and the low construction risks associated with wind- and solar power projects, which comprise about 90% of projects under construction.

Furthermore, the placement of some operational assets under GEH, dividends from restricted groups (subject to compliance with covenants), together with demonstrated financial support from strong shareholders place GEH's overall credit risk profile at 'B+'. Fitch expects GEH's consolidated financial leverage, as measured by debt to EBITDA, to also remain around 5x in the medium term, based on our expected investment assumptions for the group.

GEH Shareholder Profile Beneficial: We believe the credit risk profile of GEH has improved following the acquisition by GIC, Singapore's sovereign wealth fund, of a majority stake in GEH in November 2015. GIC's involvement and support has been demonstrated through new equity infusions to GEH in 2016 of USD80m, and the addition of Abu Dhabi Investment Authority (ADIA) as a minority shareholder in GEH via a USD150m investment. We expect GIC will continue to drive tighter risk management practices and financial policies at GEH, while improving transparency and governance. The company has also tightened its forex risk management policies under GIC. Overall, we also view that refinancing risks associated with the company's bullet debt maturities relating to the USD550m bonds issued by GBV and the proposed bonds have reduced.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GIL include:

- The plant load factors for the wind power projects are in line with the P75 estimates (25% probability that the projects will not meet the estimates) in the medium to long term

- Profitability in line with past trends

- Addition of operating assets and dividend payments by the restricted group of companies as allowed by the conditions in the bond indenture

RATING SENSITIVITIES

For rated notes to be issued by GIL

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- A weakening of GEH's credit profile

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Positive rating action is unlikely in the next 18 to 24 months given GEH's credit profile

For GEH

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Any changes to shareholding that adversely affect the company's overall risk profile, including its liquidity and refinancing, risk management policies or growth risk appetite

- Weakening in operational or financial performance of its assets and/or aggressive investments that are not sufficiently supported by equity, which lead to debt to EBITDA being sustained over 5x and EBITDA interest coverage sustained significantly below 2x.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- No positive rating action is expected in the next 18-24 months because of the expected capex, capital structure and credit metrics