"The credit enhancements provided by GuarantCo lower the probability of default and enhance noteholder recovery, underpinning the notes' investment-grade rating with a stable outlook," adds Tay, who is also Moody's Lead Analyst for ZRG.
The (P)Baa3 rating reflects the following credit strengths: (1) the GuarantCo principal indemnity which enhances noteholder recovery for up to 50% of principal shortfalls in the event of an issuer default, while the remainder of the notes remain exposed to credit risk of the issuer; (2) the GuarantCo coupon indemnity which provides additional liquidity in stress scenarios; (3) Moody's expectation of stable cash flows amid long-term fixed-tariff power purchase agreements; (4) enhanced project-level liquidity from additional reserves; and (5) project finance protections, including restrictions on ZRG's business activities and distributions, limitations on additional debt, and a noteholder security package comprising (inter alia) charges over the assets, land, accounts and shares.
The rating includes a two-notch uplift reflecting the credit enhancements provided by GuarantCo, relative to Moody's view of the ZRG's standalone credit profile. This uplift is a result of (1) GuarantCo's strong credit quality, (2) the terms of the notes, and (3) the features and size of the indemnities and the fact that these indemnities lower the probability of default and improve the expected recovery rate following an issuer default. GuarantCo's involvement in the transaction also enhances ZRG's governance and risk management due to the environmental and social requirements embedded in the Recourse Agreement between GuarantCo and ZRG.
ZRG benefits from positive macroeconomic and sectoral trends in renewable energy and thus has low exposure to carbon transition risk. The group's renewable energy business is aligned with India's target to reduce its carbon footprint and meet its nationally determined contributions.
However, the rating also reflects the following credit challenges: (1) ZRG's lack of geographic diversification and limited operating track record; (2) its exposure to financially weak off-takers; and (3) its high financial leverage.
RATIONALE FOR STABLE OUTLOOK
The outlook on the rating is stable, reflecting Moody's expectation of stable cash flows from the long-term power purchase agreements and the absence of construction risk for the portfolio of assets in the restricted group. These factors should support ZRG's standalone credit quality.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
An upgrade of the rating is unlikely, given the limited opportunities available to ZRG to meaningfully increase its revenue, both organically and on a sustained basis.
Moody's could downgrade the rating if: (1) there is a material and significant deterioration in GuarantCo's credit quality; (2) ZRG's operating performance weakens as a result of sustained liquidity stress or the FFO/debt declines below 4% on a sustained basis; or (3) its offtakers' credit quality declines to an extent that ZRG's standalone credit quality deteriorates.
The principal methodology used in this rating was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
ZRG consists of seven restricted subsidiaries that are wholly- or majority-owned by ReNew Power Private Limited. The restricted subsidiaries operate wind and solar power plants with a total capacity of 160 megawatts as of March 2020. The weighted average operating history of the portfolio is around 3.6 years and the weighted average remaining tenor of the power purchase agreements is 21.4 years.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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.
Ray Tay Senior Vice President Project & Infrastructure Finance Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Terry Fanous MD-Public Proj & Infstr Fin Project & Infrastructure Finance JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Singapore Pte. Ltd. 50 Raffles Place #23-06 Singapore Land Tower Singapore 48623 Singapore JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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