KEY RATING DRIVERS
The downgrade reflects
significant slippages in the Phase II project schedule, as reflected by the physical
progress of 68%, while the project’s scheduled commercial operations date is 31
August2016. The lenders’ engineer has revised the expected completion date of
the project to March 2018. Given the further delay in the project, according to
the company, the project cost is estimated to increase to about INR65,000m from
the present approved cost of INR50,050m. Engie
Global Developments BV (Engie) is a financially and operationally strong
developer and has consistently demonstrated its support for both Phase I and
Phase II since the takeover in December 2013. Despite Engie’s exit, the
proposed sale transaction involves infusion of a considerable sum in Phase II’s
trust and retention account before the transfer of assets to the prospective sponsor.
Immediate concerns of liquidity and adequacy of funds to ensure project
progress have been addressed through this arrangement. The agency’s RWE action
will be resolved upon completion of the sale process and a review of the
project progress status.
Engie’s exit is part of its worldwide strategy to increase the share of renewable power generation. The transaction structure ensures 100% equity infusion, which is a pre-condition for disbursement of first cost overrun-related debt. The sale structure involving pre-funding of a further increase in costs is in line with commitments provided by sponsor to fund any overruns through the infusion of equity, should the anticipated costs for Phase II increase.
Phase I of the project operated at a plant load factor of about 64% in FY16, and according to management, Phase I did not require any external support to meet its debt servicing obligations. MEPL has emerged as L1 in bids invited by Andhra Pradesh discoms for power generation based on imported coal. MEPL has offered 200 MW in the bid and signing of the power purchase agreement would address uncertainty in off-take for Phase I.
With respect to the Phase I project, procurement of imported coal is not a major concern in the near term, since prices of imported coal are at an all-time low and there is a supply glut. MEPL also has a 10-year fuel supply agreement with GDF Suez Energy Management Trading. Also, domestic coal supply has improved significantly due to a ramp-up by Coal India Limited. MEPL could buy domestic coal through e-auctions as well.
Key risks impacting the Phase II project debt include full exposure to merchant power due to the lack of firm long-term off-take arrangements. Long-term fuel supply agreements for domestic coal may be signed only if long-term off-take agreements are signed. The completion risk is also viewed to be high since the project has already been severely delayed and considering the handover of the project to the prospective sponsor.
Apart from the original senior bank loan of INR23,311.7m (reduced from INR23,400m) for Phase II, the INR18,850m first cost overrun of Phase II was financed at a debt-to-equity ratio of 1.5:1. According to the refinancing and cost-overrun funding plan, the sponsors have amended the sponsor support agreement on a ‘joint and several basis’. The covenants include 100% upfront injection of equity and creation of a debt service reserve account and a coal price volatility reserve prior to the revised project completion datefrom sponsor funds; these provide structural strength to MEPL’s credit profile. The sponsorhad also agreed to fund any overruns through the infusion of equity, should the anticipated costs for Phase II increase. It may be noted thatthe prospective sponsor has also offered the above-mentioned support after the takeover of MEPL.
Structurally, the lenders of each of the two phases would have a charge on the respective assets and cash flow of the project. Escrow accounts are maintained separately for each phase, and management as well as lenders of both phases have no intention of merging or creating an equal charge on the assets of the other phase.
Additional information is
available at www.indiaratings.co.in. The ratings above were solicited by, or
on behalf of, the issuer, and therefore, India Ratings has been compensated for
the provision of the ratings.
Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.