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Saturday, 19 January 2019

Indian renewables – Sustainable financing

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India is embarking on a major push towards renewable energy, and domestic companies in the sector such as Greenko and ReNew Energy have been innovative in fundraising. In the process a dynamic has been unleashed that pushes domestic investors to the forefront as a wave of disintermediation away from bank lending kicks in. By Jonathan Rogers.

As has long been the case with much of South-East Asia, India’s infrastructure projects have been largely funded via bank lending. That vehicle of financing had been fit for purpose when the region’s economies and populations were smaller and when banks’ balance sheets were relatively unconstrained. But over the past twenty-five years or so, double-digit GDP growth and the rapid urbanisation that has been the consequence of that growth for many countries in the region has created a massive infrastructure gap.

According to the Asian Development Bank, about US$1.7trn of infrastructure investment is required in the region annually until 2030 to plug that gap. And bank lending alone is insufficient to fill the funding requirement; recourse to Asia’s growing pool of investor liquidity via bond issuance is required.

In India’s case, disintermediation away from infrastructure lending by the banks is something of a necessity, given the raft of non-performing loans sitting on banks’ balance sheets, particularly those in the public sector, where delinquent loans average around 12% of total loan books.

A recent US$32bn recapitalisation of state-owned banks by the Indian government might have relieved the strain somewhat, but it would be naive to assume that banks stung by advancing project finance in recent years are about to jump back into the frame. Bond financing is required.

The Indian government has been the initiator of demand in the renewable sector via its plan to more than treble the country’s renewable energy capacity to 175GW from the current 57GW. Some 12GW–5GW is expected to be added next year, largely in the solar space. Greenko and ReNew together account for around 2GW of India’s total renewable power output annually, with each company eyeing substantial increases in capacity against the auspicious government policy backdrop.

Greenko has been the prime mover from the Indian renewable space in both offshore and offshore primary bond markets, having pioneered a bond financing structure that has been copied by other Indian renewable energy companies, including ReNew.

The modus operandi has involved Greenko issuing bonds in the US dollar offshore market and using the proceeds to purchase non-convertible debentures from special purpose vehicles established in India. This model proved sufficiently popular with Indian renewable power producers that a hefty US$2.5bn was raised in July alone by four companies in the country’s renewable energy sector.

The issuance stampede prompted a stern response from India’s financial market regulator Sebi, involving the imposition of ceilings on corporate and Masala – offshore issuance in rupees – primary issuance, although few market observers expect the regulations to have teeth in the long run.

Still, Greenko has more than proved itself as the standard bearer for India’s renewable sector in the bond markets. If there has been any doubt about its alpha status in this regard, the company’s issuance in 2015 of the world’s largest international Green bond, comprising a US$1bn five-year non-call two and a seven-year non-call three, set that aside.

The confidence of the transaction was somewhat eye-opening, coming as it did just a year after Greenko had issued a US$550m five non-call three deal at a hefty 300bp back of where the 2015 issue came.

Greenko has proved itself adept at tapping the primary public bond markets to rationalise its term funding profile, with most of its new debt funding exercises used to refinance outstanding bank loans and bonds at highly competitive rates, as it aims to reduce its gearing to around five times Ebitda from near the seven times mark.

The presence of Singapore sovereign wealth fund GIC, which owns 61% of Greenko, together with the Abu Dhabi sovereign wealth fund Adia, which holds 16%, has provided a ratings kicker for the company, substantial name-recognition comfort to investors and operational savvy. For example, via the active input of these two investors, Greenko now hedges its liability exposure 100%, versus 50% prior to their establishment of equity stakes with a combined US$230m in June 2016.

Arguably, Greenko in October established a template that heralds its way forward in terms of future fundraising by successfully tapping onshore liquidity in size and at a cost-effective yield. Albeit, this exercise, which came soon after industry peer ReNew had also tapped the domestic markets, was partially the result of the regulatory crackdown on offshore bond issuance; nevertheless, in the process, both issuers established that funding renewable energy projects via onshore institutional liquidity is eminently viable.

The company managed to print Rs30bn (US$464m) of 10-year paper, paying 8.75% to refinance a bank loan that financed the Kurnool Solar Park in Andhra Pradesh state, saving around 200bp in the process. Notably, Indian mutual funds lapped up the deal, with the strong onshore support allowing it to garner 1.5 times book cover.

“There is indeed a move towards funding in the domestic market whilst there remains a lack of clarity regarding quotas in the ‘parallel’ market. We have recently tapped the domestic market with credit enhancement bond issue targeted for Indian insurance companies, infrastructure debt funds and mutual funds and also vanilla bonds with private placements to Indian mutual funds,” said Kailash Vaswani, deputy chief financial officer at ReNew.

As a result of its blue-chip sponsors, Greenko enjoys a competitive advantage over its rival ReNew, something that was underlined via the comparative optics of the recent domestic bond exercise.

As Greenko pulled in 10-year rupee funds at 8.75%, ReNew just prior to this issuance printed at a stark 70bp back of that level. As well as the kicker from its ownership, Greenko added to the credit credentials of the debt via a long-term offtake agreement at a fixed tariff for its power from government-owned NTPC.

“Both deals had their genesis in regulatory action, but in the process managed to uncover a pot of gold in onshore institutional money, particularly in the mutual fund sector, that clearly demonstrates nascent demand for debt from the Indian renewable power sector,” said a Singapore-based syndicate head.

In the meantime, ReNew has issued three domestic deals with IFCL credit enhancement of up to 33%, which has allowed a credit push up from BBB+ to AA+. The most recent was for US$120m-equivalent, with two further deals placed bilaterally with mutual funds, raising US$70m.

ReNew had taken a leaf out of Greenko’s book in February when it copied the template of issuing in the offshore dollar markets – with a US$475m five-year non-call three senior secured Reg S/144a deal – and subscribing to onshore rupee paper. Strong demand from Asia for the Green paper, which was certified by the Climate Bond Initiative, allowed ReNew to print at an ultra-competitive 6%, from an initially guided 6.375%.

ReNew has also issued Green bonds in the domestic market, although the company is of the opinion that the tenor and pricing versus comparable is more significant to domestic investors than the bond’s Green credentials.

“We have issued Green bonds in the domestic market without third-party verification. Domestic investors are less sensitive to that dynamic than international investors and tend to look at the product on an absolute relative value basis,” said Vaswani.

All of the above is grist to the mill, but there are doomsayers in certain quarters who foresee impending problems in India’s renewable energy sector, in particular in the wind power sector. The word “crisis” has even been used in the wind sector, given that newly installed capacity in 2017/18 is set to chalk up at just 1,000MW, versus 5,400MW installed in 2016-17.

Turbine manufacturing in India, which manufactures all the turbines used in the country’s power plants – India’s IPPs don’t import the equipment – has ground to a halt this year. Blame for this has been placed squarely with local governments, which appear to be damaging the power purchase agreement market with tariff-based competitive bidding via auction.

The earlier model, which applied until the Union government auctioned 1,000MW of capacity in February, was for “feed-in-tariffs” to be fixed by state regulators and agreed with wind energy companies, allowing them to commission power plant construction on the basis of the PPAs, and keeping the tariff prices at a stable level. Now, a collapse in tariff prices thanks to the auction process threatens the profitability of energy companies in the wind sector.

But ReNew’s Vaswani begged to differ, saying: “There is no crisis in relation to tariffs in India, and the Appellate Tribunal for Electricity has ruled in the state of Gujarat that there can be no renegotiation of offtake agreements based on falling tariff rates. As far as wind power is concerned, there has been stress with OEMs due to fall in demand for equipment, but there have been government auctions for capacity enhancement and although there has been a shake-out this year, the industry will emerge stronger in 2018.”

There are also fears in the solar sector that an anti-dumping policy on foreign-made solar panels will be imposed by the Indian government; if enacted, the cost of setting up a solar power plant would rise, given that around 90% of the solar panels used in Indian plants are imported – from China, Taiwan and Malaysia – and are around 10% cheaper than locally-made panels. The fear is that an anti-dumping tariff – rumoured to be for as much as 25% for imported panels – will prompt local panel producers to increase their prices, making the cost of establishing new solar plants prohibitive.

“All is not well in India’s solar power sector. There has been a government moratorium on auctions for new solar plants and the aim of establishing 1,000MW of installed solar power by 2022 seems overly ambitious in the current circumstances. And there’s a fear that solar power tariffs could balloon if anti-dumping duties are imposed. If that were to be the case, then the power distribution companies would shun solar power in favour of cheaper sources,” said a Singapore-based project finance banker.

A less than auspicious outlook for solar power in India might be inferred from SkyPower’s move to offload its solar power plants in the country. The Toronto-based renewable energy company is said to be in talks with both Greenko and ReNew to sell its stake in solar farms based in Telangana and Madhya Pradesh.

At the same time, if acquisition activity is a reflection of a bullish market take, then Greenko’s interest in an acquisition of Reliance Infrastructure, part of the Reliance Group conglomerate, ticks that box. A ticket of around US$2bn would be written for the deal, which would cover a hefty 2,800MW of generation and distribution, licensed for the next twenty-odd years.

An offer was submitted in November by Greenko, with the asset also attracting interest from Torrent and Adani, with financial backing in the wings from State Bank of India and Standard Chartered for the respective parties. Given the weight of interest in the asset, a competitive auction might be conducted for any sale.

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