Hong Kong, July 18, 2017 -- Moody's Investors Service has assigned a provisional (P)Ba3 rating to
the proposed 5-year USD backed senior unsecured notes of Azure
Power Energy Ltd (APE).
The notes are guaranteed by its holding company Azure Power Global Limited
(APGL, unrated).
The rating outlook is stable.
The provisional status of the rating will be removed upon completion of
the transaction under satisfactory terms.
APE is a special purpose vehicle which will use the proceeds from the
USD notes to subscribe to senior secured Indian rupee (INR)-denominated
bonds to be issued by 17 restricted subsidiaries in the restricted group
(Azure RG).
The restricted subsidiaries are wholly- or majority-owned
by APGL. APE is also a part of the Azure RG.
The holders of the USD notes will benefit from a guarantee from APGL,
and from a share pledge over the issuer, thereby establishing a
linkage between the credit profile of APE, Azure RG and APGL.
APGL's guarantee on the USD notes will not be released unless Azure
RG's combined leverage ratio, defined as a debt/EBITDA ratio,
falls below 5.5x.
APGL is a leading solar power company in India, with 38 projects
-- including 26 operational projects with a total capacity of 771
megawatts (MW) and projects under construction with a total capacity of
298 MW -- across 18 states as of 31 March 2017.
Azure RG sells the power generated from its solar power plants to sovereign-owned
entities, including NTPC Limited (Baa3 positive) and Solar Energy
Corporation of India (SECI, unrated), and state-owned
distribution companies. The sales are implemented under long-term
power purchase agreements (PPAs) with mostly fixed tariffs.
The proceeds of the proposed 5-year USD senior notes will be used
to (1) refinance the existing project debt of the restricted subsidiaries
and (2) raise funds for general corporate purposes.
RATINGS RATIONALE
"The (P)Ba3 rating of the proposed USD notes mirrors the credit quality
of Azure RG, which is in turn supported by its geographic diversification
across various states in India, and the diversification of offtakers,
which include sovereign-owned entities, such as NTPC and
SECI," says Mic Kang, a Moody's Vice President
and Senior Analyst.
"The rating also benefits from APGL's strong operating management,
good disclosure standards, and strong and committed shareholders,"
Kang adds.
At the same time, the rating considers Azure RG's high financial
leverage, the limited track record of the majority of projects within
Azure RG, and its exposure to financially weak state-owned
distribution companies which account for around two-thirds of revenues.
Other rating considerations include India's evolving policy framework
for renewables.
Moody's expects that Azure RG will maintain visible operating cash
flows for at least the next one to two years, supported by Moody's
expectations of lower exposure to seasonality, leading in turn to
narrower volatility in generation volumes relative to other renewable
sources, such as wind.
Moody's projects that Azure RG's funds from operation (FFO)/debt
and FFO/interest coverage ratios will be in the 6%-8%
range and the 1.6x-1.7x range over the next one to
two years. The achievement of these metrics will be assisted by
incremental operating cash flow from recently commissioned projects and
by the near completion of a new project (with a capacity of 100MW) scheduled
to start commercial operation by December 2017.
Also, Moody's views Azure RG as representing backbone assets
in APGL's value chain -- from in-house engineering,
procurement & construction (EPC), operation & management
(O&M), power generation, and sales to offtakers --
and which serve as a key platform in the shareholders' investments
in India's renewable sectors.
The presence of an experienced management team will mitigate the ramp-up
risk associated with new projects. Azure RG's total solar
power capacity is scheduled to increase to 621MW by December 2017 from
521 MW in March 2017.
Furthermore, the credit profile of Azure RG benefits from a degree
of support from International Finance Corporation (IFC, Aaa stable)
and Caisse de depot et placement du Quebec (CDPQ, unrated) which
own 29% and 20% of APGL. It is likely that they will
provide support for APGL in case of need, consistent with their
shareholdings.
To mitigate the currency risk stemming from the absence of USD-based
revenues to service the proposed USD notes, APE will undertake a
hedging program to manage USD/INR exchange rate movements by implementing
a full hedge for the coupon and call-spread hedges of the principal
for INR movements as far as an exchange rate of INR90 against the dollar.
In addition, Moody's expects APGL to ensure that APE is not
exposed to significant foreign-exchange risks which would be incurred
by the INR's depreciation against the USD to above the defined level,
given Azure RG's importance in its value chain.
The terms of the proposed USD notes include restrictions on Azure RG's
debt incurrence and restricted payments to the parent with certain carve-outs,
thereby mitigating concerns over potential material cash leakages to any
entities outside Azure RG.
The USD notes will be secured by a first priority pledge of APE shares
and an escrow account of APE. The INR bonds to be issued by Azure
RG will be secured by the moveable and immovable assets of the restricted
subsidiaries under the subsidiary, as well as by 51% share
pledges and by rights under project documents. The INR bonds will
be cross guaranteed by the restricted subsidiaries.
The stable outlook reflects Moody's expectation that incremental cash
flows from newly commissioned projects under long-term PPAs will
lead Azure RG to maintain its credit metrics within the tolerance levels
of a Ba3 rating category over the next 12-18 months, without
any material ramp-up risk, and APGL's credit quality
will not deteriorate materially.
Azure RG is solidly positioned in its rating. Upward rating momentum
could evolve if FFO/debt and FFO/interest coverage ratios are maintained
above 9% and 2.0x on a sustained basis and if APGL's
credit quality improves. Such improvements could be achieved with
a track record of larger and stable operations.
The rating could come under downward pressure if APGL's credit quality
deteriorates and/or Azure RG's FFO/debt falls towards 4%
on a sustained basis.
The principal methodology used in this rating was Power Generation Projects
published in May 2017. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Azure Power Energy Ltd is a special purpose vehicle, which was incorporated
in Mauritius in 2017 as a wholly owned subsidiary of Azure Power Global
Limited (APGL). The restricted subsidiaries under the proposed
USD notes issuance are wholly or majority owned ultimately by APGL.
The restricted subsidiaries operate solar power plants with a total capacity
of 521 MW in March 2017 and are scheduled to commission an additional
solar power plant with a 100 MW capacity by December 2017.
Listed on the New York Stock Exchange, APGL is one of the largest
solar power companies in India, with a total capacity of 1,069
MW (including 298 MW solar plants under construction) across 18 states
as of 31 March 2017. APGL is 29.3% owned by IFC and
20.3% by CDPQ, while the remainder is owned by Foundation
Capital (14.1%), Helion Venture Partners (13.2%),
its founders (6.8%) and the public (16.2%).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Mic Kang
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Terry Fanous
MD-Public Proj & Infstr Fin
Infrastructure Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
