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Rating Action:

Moody's assigns first-time (P)Ba3 rating to Azure Power Energy Ltd's USD senior notes

18 Jul 2017

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

No Related Data.
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