By Shakthivel Saravanan

India Ratings and Research (Ind-Ra) has affirmed Sembcorp Energy India Limited’s (SEIL) bank facilities as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Project 1

Term loans

-

-

 30 June 2036

INR41,420 (reduced from INR44,604.1)

IND AA-/Stable

Affirmed

External commercial borrowings

-

-

-

USD217

(reduced from USD229.5)

IND AA-/Stable

Affirmed

Working capital facilities

-

-

-

INR20,500

IND AA-/Stable

Affirmed

Non-fund-based facilities

-

-

-

INR596

IND AA-/Stable

Affirmed

Project 2

Term loans

-

-

31 December 2036

INR28,540

(reduced from 29,473.3)

IND AA-/Stable

Affirmed

Working capital facilities

-

-

-

INR11,000

IND AA-/Stable

Affirmed

Non-fund-based facilities

-

-

-

INR14,000

IND AA-/Stable

Affirmed


Analytical Approach: SEIL is a holding company of Sembcorp group’s energy assets in India. SEIL owns and operates 2,640MW of thermal power projects consisting of project 1 and project 2. SEIL also owns 1,730MW of renewable assets, developed and operated by Sembcorp Green Infra Limited (SGIL), a 100% subsidiary of SEIL. Since project finance characteristics continue in SEIL including the ring-fencing and waterfall mechanisms, Ind-Ra continues to apply its Infrastructure and Project Finance and Parent-Subsidiary Rating Linkages criteria for reviewing the ratings. 

Sembcorp Utilities Pte Ltd (SCU), the sponsor, has met the entire equity requirements of SGIL till date. The loan covenants of SEIL have a well-specified ring-fencing and waterfall mechanism in SEIL and residual cash flows, after meeting the restricted payment covenants may be used for investments or any other purpose. Hence, Ind-Ra has analysed SEIL on a standalone basis. 

The ratings apply only to the senior debt and not for the masala bonds subscribed by the sponsor or the subordinated debt. While arriving at the ratings, Ind-Ra has not consolidated the masala bonds with the senior debt, given the financial covenants and that masala bonds are considered as junior to the senior debt. 

The ratings continue to reflect SEIL’s operational performance being in line with Ind-Ra’s base case assumptions for FY20, adequate debt service coverage ratio (DSCR), an intact debt service reserve account and presence of long- and medium-term coal linkages. Additionally, the ratings are underpinned by SEIL’s strong linkages with the sponsor, SCU, as reflected by the guarantees provided to the lenders for a certain percentage of the loans. Lenders of project 1 have an option to request trimming the outstanding debt in case of non-renewal of power purchase agreement (PPA) with Telangana distribution companies or failure to enter into any long-term PPA. Given the support extended in the past and strategic importance of the thermal assets to SCU, the agency expects SCU to support both the projects, should a need arise. 

KEY RATING DRIVERS

Strong Sponsor: SCU is 100% subsidiary of Sembcorp Industries Limited, a Singapore-listed entity, which has significant shareholding by Temasek Holdings Pte. Limited (Temasek), a sovereign wealth fund held by the Singapore government. In December 2019, SCU had acquired the entire stake of Gayatri Energy Ventures Pvt. Ltd. in SEIL. SCU now owns 100% of SEIL. The group’s experience in developing and operating large infrastructure and renewable projects globally and its significant ownership by Temasek are credit positive. SCU infused funds in FY17 and FY18 by subscribing to masala bonds to reduce the external debt in project 2. This made project 2 self-sustaining, despite the lack of long-term PPAs.


Sponsor Support: The ratings continue to reflect the strong strategic, legal and operational linkages between SEIL and SCU as assessed under the ‘Parent and Subsidiary Rating Linkage’ criteria.  SCU has guaranteed 26% of outstanding long-term debt in project 1. 

For project 2, SCU has extended a conditional corporate guarantee for its entire long term debt. The guarantee for term loan, working capital and non-fund based facilities will fall off when the project demonstrates an average DSCR of 1.2x upon signing long-term PPAs, subject to approval from the lenders. SCU is required to fund any contingent liability arising due to new environmental stipulations with respect to project 2, if any.
 

In the absence of a firm off-take for a substantial capacity, SCU had infused INR42.4 billion in project 2 by subscribing to masala bonds which are unsecured and subordinated to the rated senior debt. Subscribers to the masala bonds will not have the right to call an event of default for non-payment of principal and interest, deferral in interest or non-payment of any principal maturity or if SEIL does not honour the put option. The masala bonds can be refinanced after meeting DSCR of 1.25x upon the signing of long-term PPAs with approval from lender.

Minimal Fuel Risk: Ind-Ra believes the fuel supply risk to be minimal for project 1, considering most of the required quantity has already been tied-up through long-term fuel supply agreements (FSA) and short-term contracts. The FSA with Mahanadi Coalfields Limited for 4.27 million tonne per annum (MTPA) and with PT Bayan Pte Indonesia for 10MTPA are in place. Given the plant is a coastal power project, securing additional fuel through imports may not be challenging. Under long-term PPAs with Telangana (project 1) the cost of imported coal is pass through.

For project 2, SEIL has a long-term contract for supply of coal with PT Bayan Resources TBK for 1.3MTPA for 10 years. The remaining fuel requirement is met through short-term contracts. Furthermore, project 2 has FSAs for 4.27MTPA with domestic coalfields that will be effective upon the execution of the long-term PPAs. Ind-Ra believes the plant’s cost dynamics are exposed to price volatility of imported coal and e-auction domestic coal for the capacity sold on merchant basis.

 

Proven Technology, Experienced In-house O&M Team: The supercritical coal-fired units use conventional commercially proven technology and are completely operational since FY16 (project 1) and FY17 (project 2). An in-house O&M team is running the plant. Project 1 has historically maintained a plant availability factor (PAF) of above 90% (barring FY19), higher than the normative level of 85%. Project 2 has maintained availability higher than 85% till date. The project, according to the Bangladesh Power Development Board (BPDB) PPA, is likely to maintain a normative level of 90% FY21 onwards. Furthermore, the projects have historically maintained station heat rate and auxiliary consumption in line with Ind-Ra’s estimates, thus reinforcing SEIL’s operating strength.

 

Overall Operational Performance in line with Base Case Estimates: In FY20, project 1 demonstrated a higher plant load factor of 88.8% (FY19: 72.5%) due to an significant increase in the PAF. In FY19, project 1 experienced generator stator earth fault and remained non-operative for four months till February 2019.Project 2’s plant load factor declined to 72.5% (82.2%), primarily due to a reduction in PAF to 88.3% (96.5%).

 

FGD Status: According to the latest environmental norms for thermal plants announced by the Ministry of Environment, Forest and Climate Change, the government of India, SEIL has to install a flue gas desulphurisation (FGD) system in its plants to meet the new emission standards. This capex is proposed to be funded through a mix of debt and equity. Ind-Ra believes the cost incurred for FGD installation in project 1 will be a pass through under the PPA with Andhra Pradesh (AP) and Telangana discoms, though the extent of pass through and related processes are not clear yet. Furthermore, SEIL has represented to the Central Electricity Regulatory Commission for considering the FGD cost pass through mechanism. Meanwhile, the lenders have appointed a consultant for the techno economic viability study and Ind-Ra will continue to monitor the status of FGD installation.

Liquidity Indicator – Adequate: According to the management, SEIL had free cash of INR1,209.4 million and INR2,933.5 million in project 1 and project 2, respectively, as on 31 July 2020. The availability of a debt service reserve for one quarter (project 1) and two quarters (project 2) of debt servicing is also a positive for the project. In project 1, SEIL’s ability to raise short-term funds through commercial papers within the overall sanctioned working capital limits of INR20,500 million sanctioned by the lenders, coupled with the availability of moderate unutilised working capital limit, strengthens the project’s liquidity profile. The surplus is distributed post the compliance of restricted payment covenants and after receiving the lender’s approval. SEIL has not availed the Reserve Bank of India-prescribed debt moratorium.

Moderate Debt Structure: The facility 1 and facility 2, under the rupee term loan for project 1, are repayable in 79 structured quarterly instalments ending FY36 and FY37, respectively. The external commercial borrowing for project 1 is repayable in 20 structured quarterly ending FY22. SEIL has converted a part of existing term loan to foreign currency non-resident loans resulting in interest savings. In FY20, project 1 has complied with all the financial covenants: DSCR, interest coverage ratio and fixed asset coverage ratio. The rupee term loan for project 2 is repayable in 78 structured quarterly instalments ending FY37. In FY20, project 2 met financial covenants, if the masala bond is excluded from the calculation of DSCR, interest coverage ratio and debt to EBITDA.  The lead lender had waived the penal interest on account of the breach of financial covenants. Ind-Ra observes that the DSCR for project 2, excluding payments towards masala bonds, is comfortable.

Both the projects have individual TRA accounts. The surplus cash flow after adherence to the respective waterfall in either of the projects could be utilised for any shortfall in the other project before distribution. Any residual cash flows, subject to restricted payment covenants in the respective projects, will be utilised towards interest payments on masala bonds or fund the growth capital required for the group’s renewable energy business.

Moderate Revenue Risk: For project 1, about 86% of the capacity is tied through long- and medium-term PPAs with AP and Telangana discoms. The certainty of revenue on long-term basis augurs well for the ratings. The remaining capacity is tied-up under short-term PPAs or for sale on merchant basis.


For project 2, the firm offtake of 250MW (20% of capacity) for 13.5 years by BPDB has led to reasonable revenue visibility in the medium term. So far, SEIL has exhibited a consistent track record of tying up short-term PPAs/sale on merchant basis; however, reduced power demand due to the COVID-19-led national lockdown and economic slowdown resulted in some capacity of project 2 lying idle in 1QFY21. The level of long-term PPA tie-up for project 1 and project 2 at around 53% constrains the ratings.
 

Establishment of LC by Offtakers; Debtor Days Remain High: The PPA provides for a payment security mechanism in the form of a revolving letter of credit (LC). Accordingly, an LC equivalent to about one month of revenue was established by AP and Telangana discoms in FY20. Additionally, the LC opened by BPDB is equivalent to three months of revenue. The presence of such a payment security mechanism provides comfort to the ratings.

 

Project 1 is dependent upon debt-ridden counterparties with significant average cost of supply – average realisable revenue gaps for revenues and hence is exposed to increased debtors. Project 2 has short-tenor supply arrangements with various counterparties; the diversity in counterparties may alleviate any huge receivable build up. Since project 2 earns its significant revenue from bilateral PPAs and power trading, the receivable risk is mitigated to a greater extent. Furthermore, the revenue realisation from BPDB is within 45 days of invoicing.  

The receivable period for SEIL  increased to 110 days in FY20 (FY19: 95 days FY18: 75 days); however, it has reduced post the receipt of INR7,849 million in July 2020, resulting in a receivable period of around 95 days. 


RATING SENSITIVITIES

Negative: SEIL’s plant performance (project 1 and project 2) falling significantly below the base case estimates, an increase in receivables days beyond 180, absent sponsor support or any weakening of linkages with the sponsor will be negative for the ratings. 


COMPANY PROFILE

SEIL (project 1) built a 1,320MW (2 x 660MW) super critical thermal power project in Painampuram, AP. Unit 1 and Unit 2 were commissioned on 11 April 2015 and 15 September 2015, respectively.  The  project 2 had implemented a 1,320MW (2 x 660MW) coal-fired thermal power plant near the port city of Krishnapatnam, AP. Unit 1 and Unit 2 were commissioned on 17 November 2016 and 21 February 2017, respectively. In October 2018, SEIL’s former subsidiary Sembcorp Gayatri Power Limited was dissolved and merged with SEIL. In December 2019, SCU had acquired the stakes of GEVPL and hence now owns 100% of SEIL.

 

FINANCIAL SUMMARY 

 

Particulars

(INR million)

Project 1

Project 2

FY20

FY19

FY18

FY20

FY19

FY18

Total income

43,810

38,211

41,787

30,852

38,558

33,178

EBITDA

15,755

14,087

13,323

7,310

8,039

5,512

Profit after tax

5,485

2,681

1,858

-4,298

-3,314

-8,187

Source: Project 1 & Project 2 Standalone Financial Statement



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook/Rating Watch

Rating Type

Rated Limits (million)

Rating

22 July 2019

22 June 2018

8 March 2018

Term loans

Long-term

INR69,960

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A/RWP

External commercial borrowings

Long-term

USD217

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A/RWP

Working capital facilities

Long-term

INR31,500

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A/RWP

Non-fund-based facilities

Long-term

INR14,596

IND AA-/Stable

IND AA-/Stable

IND AA-/Stable

IND A/RWP



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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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.

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Analyst Names

  • Primary Analyst

    Shakthivel Saravanan

    Analyst
    India Ratings and Research Pvt Ltd Harmony Square 3rd Floor, Door No. 48 & 50 Prakasam Street T Nagar Chennai - 600017
    +91 44 43401739

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121