The rating reflects the high quality credit strengths of the underlying assets which include the solid debt service coverage ratios for external debt, strong liquidity and favourable gearing (debt-to-asset value). Also the Infrastructure Investment Trusts (InvIT’s) unencumbered asset (Jabalpur Transmission Company Limited: JTCL) underpinned by predictable cash flows due to the nature of availability of the transmission assets, lends strength to the rating.
Ind-Ra expects the assets to provide stable EBITDA margins given the low risk operating environment over the long term. Given the stable asset profile, low operational complexity, predictable lifecycle maintenance cost, efficient collection mechanism and stable regulatory framework, Ind-Ra believes that even at the operating company level, the refinancing risk is largely mitigated. That being said, the underlying assets may be exposed to the interest rate risk at the time of refinancing.
Sterlite Power Grid Ventures Limited (SPGVL, IND A/Stable) has floated an InvIT called IndiGrid and is planning to hive off Sterlite Grid1 Limited (SGL1) under the trust. SGL1 holds the two operating transmission assets - Bhopal Dhule Transmission Company Limited (BDTCL) and JTCL, which are the initial portfolio assets. Subscription to IndiGrid‘s units will be raised in a process similar to an initial public offer for raising equity funds by a companies. BDTCL plans to mobilise INR10bn non-convertible debentures with a tenor of seven years. The unit and bond proceeds will be used to retire the existing bank loans and promoter’s sub-debt in BDTCL and JTCL. Post the issuance, SPGVL is likely to hold 15%-25% of IndiGrid, depending on the valuation/subscription by other investors.
IndiGrid was established under Indian Trusts Act 1882 by signing deed of trust dated 21 October 2016 with the trustee (Axis Trustee Services Limited). Trustee would monitor the IndiGrid’s operations in relation to its investment objectives and compliance to applicable regulations. IndiGrid is registered on 28 November 2016 under the Securities and Exchange Board of India (Infrastructure Investment Trust) Regulations 2014 (InvIT regulations). As required by InvIT regulations, IndiGrid has appointed Sterlite Infraventures Limited (SIVL) and SPGVL as investment manager and project manager respectively. IndiGrid would receive interest on the debt lent to the portfolio assets and the dividend from the assets. Debt lent from IndiGrid to its assets would be sub-ordinate to any external debt present in the assets.
KEY RATING DRIVERS
High Quality Underlying Assets: IndiGrid‘s ratings are driven by the monopolistic nature of the underlying transmission assets, including potential acquisitions. Historical track record of the assets indicates a robust asset availability of over 99%, since project commissioning. The comfortable asset availability and stable revenue stream, bolstered by timely payments through the regulator driven revenue pooling mechanism for interstate assets generates sufficient liquidity since the commercial operations. Change in the regulation for interstate assets affecting the pooling mechanism will be treated as an event driven risk.
Revenues for transmission assets have a high certainty and relatively low dependence on regulatory intervention, compared to other power assets. The tariff recovery for transmission assets depends on its availability and is unaffected by the quantum of power flow. Given the concentration of conventional energy generation and renewable energy generation in specific regions of the country, transmission networks plays an integral role in transferring power to demand centres and will remain critical in the power supply value chain. Transmission assets use standard technology and life cycle cost for transmission assets are the lowest compared to other infrastructure assets.
The due diligence report by Lahmeyer International (India) Private Limited confirms that the assets of BDTCL and JTCL comply with the required design and quality standards for such assets.
Robust Finances and Appropriate Leverage: The rating benefits from the strong financial profile, propped up steady earnings and continued combined EBITDA margins above 88% in FY16 and 1HFY17. The trust’s assets were acquired through tariff based competitive bidding and majority of the revenue is fixed for 35 years. EBIDTA margin for the assets in IndiGrid is expected to be about 90% for the next few years and tappers gradually due to the decreasing revenue profile (as per the quoted bid) and uptick in operating and maintenance expenses. The trust’s debt service coverage ratio (accounting for the consolidated current external debt of INR10bn) would be robust consistently, assuming revenue from two underlying assets, based on the projected amortisation schedule. Ind-Ra expects that IndiGrid’s financial metrics can withstand a higher level of debt (within the regulatory ceiling of net consolidated borrowings and deferred payments of InvIT not exceeding 49% of the value of the assets) with similar revenue profile and these parameters augur well with the rating. According to InvIT regulations, the portfolio assets have to distribute at least 90% of the net distributable cash flows. However, the strong debt service coverage levels and presence of three month debt service reserves for the proposed external debt cushions the rating.
The proposed external debt in IndiGrid is INR10bn. Estimated asset value of the initial portfolio is INR35.8bn, according to the independent valuer. External debt/EBIDTA for IndiGrid is expected to be maximum of 2.47x at the beginning, based on the INR10bn of external borrowing.
Refinancing Poses Limited Risk: The proposed INR10bn bonds at BDTCL are fixed rate, contain typical project finance structural features (such as debt service reserve and restricted payments clauses) and mature in March 2025, with a bullet repayment of INR720m. Despite the huge refinancing component, the dependable revenue stream, standard technology, low complexity in operating environment and long asset life provides comfort and hence, the refinancing is unlikely to threaten the project’s credit profile. However the project is exposed to interest rate risk, as the economic climate will have a bearing on the interest rates.
Acquisitions - A Rating Monitorable: Ind-Ra believes that the trust’s plan to acquire operational assets is unlikely to constrain the finances, given that the acquisition targets in transmission sector would have similar revenue certainty, low operating risks and cap on consolidated debt would be at 49% of the total asset value. The decision for acquisition would be based on yield accretion for unit holders. The trust in order to ensure stable returns for the investors, proposes to sign Right of First Offer agreement with SPGVL, to buy SPGVL‘s eight existing interstate transmission assets. Against the backdrop of the nascent involvement of private entities in the transmission sector, the trust’s acquisition targets are limited. Nevertheless, the agency expects the operational assets to exhibit similar solid characteristics unless the assets are intrastate that could have an elongated working capital cycle thereby potentially altering the underlying asset pool’s credit strength. Additionally regulation allows an annexure of under construction assets below the InvIT structure, subject to a 10% ceiling of the total asset value. Therefore, the agency will monitor the plans and review the ratings as and when there are acquisitions and disposals.
SIVL, as investment manager, would administer the operations of IndiGrid, including financial and operational aspects. SIVL would assess the potential acquisitions and propose the same for the decision of the unit holders. SIVL, though has no operational history, is likely to derive the experience of the Sterlite group in managing transmission assets.
Proven Sponsor and Operator Experience: IndiGrid benefits by the extensive experience of the sponsor and project manager, SPGVL, in the transmission sector. SPGVL is one of the largest private sector developers of transmission assets and owns ten transmission assets under its subsidiaries. SPGVL also undertakes engineering, procurement and construction work for its transmission projects. SPGVL has extensive experience in constructing and operating transmission projects. SPGVL has commissioned one of its transmission assets ahead of schedule. As project manager for IndiGrid, SPGVL would be responsible for asset maintenance and carrying out all the operational tasks required by the transmission service agreement.
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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.
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