According to reports, Fitch Ratings has affirmed the rating on Greenko Dutch B.V.’s (GBV) US$550mn notes at ‘B’. The Recovery Rating is ‘RR4’. GBV is a subsidiary of Greenko Plc, which is involved in hydro and wind power generation in India. GBV used the proceeds from the notes to refinance existing debt at operating entities within a restricted group of companies that is defined in the indenture to the note issue. The operating entities in turn issued Indian rupee-denominated bonds to GBV as part of the debt refinancing.
Fitch’s rating on the notes reflects the credit strengths and weaknesses of the debt structure and assets of Greenko’s restricted group of companies. The bond indenture contains restrictions on cash outflows and debt incurrence in order to ensure sufficient liquidity for the senior note holders at GBV. The restricted group has assets with generating capacity of 619MW as at July 2015 (235MW hydro and 384MW wind power), which generated revenue of USD90m and EBITDA of USD80m for the nine months ended December 2014 (the end of the financial year was changed to December from March).
GBV benefits from a first charge via the rupee-denominated bonds on all assets (excluding accounts receivables) and cash flows of the operating entities in the restricted group. The rating on the notes also reflects the absence of prior-ranking debt in the restricted group, aside from a stand-by working capital debt facility of USD30m secured exclusively against accounts receivables.
The assets of the restricted group are diversified by type and geography, which provides risk mitigation for adverse wind patterns or monsoon conditions. Around 60% of the hydro assets are built around rivers in northern India, which are glacier fed, while the rest are mainly dependant on the monsoons for their performance. The wind assets are spread across three states in India, though wind patterns across larger geographic areas also tend to be correlated.
Long-term power purchase agreements (PPAs) for all of the restricted group’s wind and most of its hydro assets support the issue rating. Although the long-term PPAs provide protection from price risk, production volume will vary with wind and hydro patterns. In addition, although Greenko has conducted detailed wind studies for its assets, the wind power plants have limited power-generation history with a majority of the power plants chalking up less than two years of operations.
The weak credit profile of the restricted group’s customers is a rating constraint. The restricted group’s top four customers – state utilities in Andhra Pradesh, Himachal Pradesh, Maharashtra and Mangalore – accounted for over 50% of revenue in 2014. The utilities in Maharashtra and Andhra Pradesh have a track record of timely payments, but the receivable cycle has been longer for others. The restricted group had a receivable period of around 90 days in the nine months to December 2014. Greenko has demonstrated it can terminate PPAs if payments are delayed, which may give it the ability to switch customers. However, this still exposes the restricted group to working capital pressures while it negotiates new agreements.
The gross leverage (total adjusted debt/operating EBITDA) of the restricted group fell to 5.2x at end-2014 from around 10x at end-March 2014, due to the commissioning of a large part of its capacity. The terms in the bond indenture will help in restricting the cash outflow from the restricted group if the leverage covenants are breached. Fitch expects the leverage of the restricted group to remain around 5x on a sustained basis.
The restricted group’s earnings are in rupees, but the notes are denominated in US dollars, giving rise to foreign exchange risk. GBV has mitigated the risk by hedging around half of the principal outstanding, and three years of interest payments. Fitch expects the restricted group to acquire more operational assets as allowed by the bond indenture, leaving minimal cash at the restricted group. This is likely to lead to refinancing risks when the bond matures. However, the restricted group has flexibility in its capex given its granular nature and the portfolio of wind and hydro assets will be more mature by the time the US dollar senior notes are due.
The guarantee allows Greenko Plc to extend support to the unrestricted group in the event of stress. However, Fitch expects the credit profile of unrestricted group to be weaker than that of the restricted group; hence, the rating on the US dollar notes is not enhanced by this guarantee. Greenko Plc’s leverage was 7.5x for the nine months to end-2014, because the unrestricted group also contains a number of wind and hydro power plants that are under construction.