By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has downgraded Shirpur Power Private Limited’s (SPPL) bank loan ratings as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/ Outlook

Rating Action

Rupee term loan

-

-

September 2030

INR15,140

IND BB+/Stable

Downgraded

KEY RATING DRIVERS

The rating reflects SPPL’s further postponement of the project’s commercial operations date (COD) to October 2017. The date was earlier revised to April-May 2016 from the initially scheduled October 2014. The initial cost overrun was around INR3,000 million which was financed in a debt-equity of 64:36. The further overrun of INR4,224 million is likely to be met through promoter funds (unsecured loans and equity), according to the management. 

Moreover, SPPL is exposed to inherent completion risks associated with a greenfield thermal power project. According to the September 2016 lenders’ independent engineer’s report, the project progress was 96.70% on the original schedule (target: 100%). The delay is attributed to the delays in the erection of boiler, turbine and generator, delays in the erection of transmission line and railway siding on account of right of way issues which were beyond the control of promoters. The revised cost/MW of INR82.8 million compared with the initial estimate of INR58.8 million could put pressure on the debt service coverage ratio as management expects to replace the sponsor equity contribution of INR1,500 million with debt (post commercial operation date). 

Timely infusion of the additional balance equity of INR2,442 million and funding of the debt portion of INR1,500 million will be a key determinant of the project’s ability to achieve timely completion. The total equity of the project including the cost overrun will be INR8,207.5 million. Of the total equity 26% will have to be brought in by captive consumers. Although they have not infused any funds into the project till date, the company expects them to fulfil the requirement close to the COD. 

The rating, however, reflect limited construction risk. Although the engineering, procurement and construction (EPC) contractor does not have an experience in the construction of a power plant, it has awarded back-to-back EPC sub-contracts to reputed and experienced vendors. Also, the project company has appointed experienced technical advisors and personnel. Furthermore, equipment have been sourced from reputed vendors such as Bharat Heavy Electricals Ltd 
(‘IND AA+’/Negative) and the EPC contract has adequate performance warranty and provisions for liquidated damages, in line with other Indian projects. 

Also, the project sponsor has provided an undertaking to SPPL’s lenders to cover any cash shortfalls in the latter’s debt service under the financing documents. Although completion and revenue risks have a significant bearing on the project’s credit quality at this juncture, they are somewhat addressed by the sponsor undertaking. 

The rating also reflects moderate off-take risk. The project is based on the group captive unit model; under which, group captive users will purchase at least 51% of the capacity and have to subscribe to 26% of the equity capital to avail the benefit of the unit in accordance with the extant regulations. Till date, around 80.98% of the total capacity has been tied-up under reasonably long-term power sale agreements (PSAs) with potential captive users. There are adequate incentives in PSAs to retain consumers’ patronage, even as the economic interest of the project is protected. Counterparty risks include generally weak financial profile of some of the off-takers. 

SPPL's ability to secure coal supplies in a timely manner at the contracted price is a key rating factor. SPPL has a long-term fuel supply agreement (FSA) with an Indonesian coal trader for a firm quantity of 1.25mtpa. It also has entered into an FSA with an Indonesian coal miner and negotiating for an additional FSA with a global coal trader for 0.5mtpa each at index-linked prices. The coal will be transported from Hazira port to the site through rail. But according to the management, the railway siding will be operational not before September 2017, in the interim period the coal will be transported through trucks from the port. 

The floating interest rate on the bank debt is a source of financial risk. The bank debt's variable interest rate, resettable on the COD and annually thereafter, could add to cash flow volatility. Structural features include a debt service reserve account covering two quarters of principal and interest; however, its creation only out of operational cash flow reduces its effectiveness.


RATING SENSITIVITIES

Positive: Achievement of COD along with stabilisation of plant and firm up of PSAs could result in a rating upgrade. 

Negative: Material delays in achieving he revised COD or non-compliance of group captive guidelines, along with absent sponsor support, could result in a rating downgrade.


COMPANY PROFILE

SPPL is implementing a 300MW (2 X 150MW) sub-critical thermal power plant near Dhule, Maharashtra. The plant will operate on 100% imported coal. The estimated project cost is INR24,8500 million, of which INR8,210 million is being funded by promoter funds, and the rest by debt. The SPV is a 100% subsidiary of Sixvents Power and Engineering Limited (formerly Sintex Power Limited), a part of the Sintex promoter group.



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Outstanding Limits (million)

Rating

25 February 2016

20 January 2015

11 December 2013

Rupee term loan

Long-term

INR15,140

IND BB+/Stable

IND BBB-/Stable

IND BBB-/Stable

IND BBB-/ Stable


COMPLEXITY LEVEL OF INSTRUMENTS

Project loans are instruments with moderate complexity levels where the relationship between the inherent risk factors and intrinsic return characteristics is less straightforward given the presence of certain contingency features. Special Purpose Vehicle structure is backed by a single asset. 

For more information, visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

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.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Ratnam Raju Nakka

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001742

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121