OREANDA-NEWS. Fitch Ratings has upgraded the rating on Greenko Dutch B. V.'s (GBV) USD550m notes, which are guaranteed by Greenko Energy Holdings (GEH), to 'B+' from 'B'. The Recovery Rating is 'RR4'.

The agency has also assigned GEH, which is the ultimate holding company of the group's assets, including those included in the restricted group of companies backing GBV's USD550m notes, a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+' with a Stable Outlook.

The upgrade of the notes' rating is driven by Fitch's view that the group faces lower refinancing risk associated with the notes and improved risk management policies following the acquisition by GIC, Singapore's sovereign wealth fund, of a majority stake in Greenko Mauritius in November 2015 through GEH. GIC's involvement and support has been demonstrated through new equity infusions to GEH in 2016 of USD80m, and the addition of Abu Dhabi Investment Authority (ADIA) as a minority shareholder in GEH via a USD150m investment. Under GIC's majority ownership, GEH has further tightened its financial risk management, which is evident from the move to hedge the full forex risk of the principal of the US dollar notes, from only half before.

GBV used the proceeds from the notes to refinance existing debt at operating entities within a restricted group of companies that is defined in the indenture to the note issue. The operating entities within the restricted group issued secured Indian rupee-denominated bonds to GBV as part of this debt refinancing.

KEY RATING DRIVERS

Financial Performance to Improve: Fitch expects the restricted group's financial profile to improve, supported by increased cash generation as the impact of the El Nino on wind patterns and monsoons subsides and more operating assets are added to the group. The agency expects financial leverage (as measured by total adjusted debt/operating EBITDA) of the restricted group to improve to around 5x by the end of the financial year to 31 March 2017 (FYE17), compared with 6.2x in FY16, which was adversely affected by the effects of El Nino and depreciation of the Indian rupee against the US dollar. We expect further assets to be added to the restricted group under GBV over time, subject to terms and conditions in the bond indenture, including debt to EBITDA incurrence tests.

Diversified Operations, No Construction Risk: All of the assets within the restricted group, with total capacity of 623MW, are now in operation for at least two years. The power projects are diversified by type and geography, which mitigates risks from adverse wind patterns or monsoon conditions. Around 60% of the hydro assets are built around rivers in northern India, which are glacier fed, while the rest are mainly dependant on the monsoons for their performance. The wind assets are spread across three states in India, though wind patterns across larger geographic areas tend to be correlated.

Price Certainty, but Volume Risks: Long-term power purchase agreements (PPAs) for all of the restricted group's wind and most of its hydro assets support the credit profile of the restricted group. Although the long-term PPAs provide protection from price risk, production volume will vary with wind and hydro patterns, as was evident in FY16, despite the diversification of the assets.

Weak Counterparty Profile: The weak credit profiles of the restricted group's customers continue to be a rating constraint. The restricted group's top three customers - state utilities in Andhra Pradesh, Maharashtra and Himachal Pradesh - accounted for about 50% of revenue in FY16. The utilities in Andhra Pradesh and Himachal Pradesh have a track record of timely payments, but the receivable cycle has been longer for others. The average receivable days, however, has remained broadly stable, although it rose to around 97 days in FY16 from around 90 days in 2014. GBV has demonstrated it can terminate PPAs if payments are delayed, which may give it the ability to switch customers. However, this still exposes the restricted group to temporary loss of revenues and working capital pressures while it negotiates new agreements.

Guarantee, Structural Enhancements to Notes: The guarantee by GEH does not enhance the note's rating as the credit risk profiles of both GEH and the GBV restricted group are assessed at the same level. However, GEH's guarantee on the notes is beneficial to note holders as the assets of the restricted group are not effectively owned by GBV. The structural features created through the notes indenture provide additional protection via restrictions and limitations on use of cash and investments at the restricted group level. Furthermore, note holders benefit from access to cash generation and assets of the restricted group through the rupee-denominated notes, via which the proceeds of the US dollar notes are on-lent to the asset owners of the restricted group. The rupee-denominated notes have a first charge on all assets, except the accounts receivables, of the restricted group. Indirectly, the note holders also benefit from the absence of any prior-ranking debt in the restricted group, aside from a working capital debt facility of a maximum of USD30m, which is secured against accounts receivable.

Significant Reduction in Refinancing Risk: We believe the association with GIC and ADIA will improve GEH's access to funding, including in the banking and capital markets. High refinancing risk, given the bullet maturity of the entire long-term debt of the restricted group, together with forex risks, previously constrained the US dollar bond's ratings at 'B'. There is evidence that the new shareholders intend to take a less aggressive approach to the capital structure while seeking growth in the asset base of GEH. Tighter forex risk management policies introduced are also beneficial. We expect GIC will continue to drive tighter risk management practices and financial policies at GEH, while improving transparency and governance. Five out of the nine directors on GEH's board are from GIC and one is from ADIA.

Hedged Forex Risk: The restricted group's earnings are in Indian rupees, but the notes are denominated in US dollars, giving rise to foreign-exchange risk. However, GBV has hedged the entire outstanding principal on its USD550m 8% notes due 2019, compared with only half of the principal a year earlier. The coupon payments on the notes continue to be fully hedged.

GEH's Credit Profile: GEH, including the 623MW of assets in the GBV restricted group, has about 1,901MW of assets, of which 998MW are operational. GEH's credit risk profile is somewhat elevated by the construction risks as well as structural subordination of cash flows of operational assets with prior ranking debt, such as the GBV restricted group. However, asset construction and execution risks in our view are mitigated by group's established track record and the low construction risks associated with wind - and solar power projects, which comprise about 90% of projects under construction. Furthermore, some operational assets under GEH, dividends from assets, including some from the GBV restricted group, together with demonstrated financial support from shareholders places GEH's overall credit risk profile at 'B+'. Fitch expects GEH's consolidated financial leverage, as measured by debt to EBITDA to also remain around 5x in the medium term, based on our expected investment assumptions for the group.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GBV include:

- The plant load factors for the wind power projects are in line with the P75 estimates (25% probability that the projects will not meet the estimates) in the medium to long term

- Profitability in line with past trends

- Addition of operating assets and dividend payments by the restricted group of companies as allowed by the conditions in the bond indenture

RATING SENSITIVITIES

For rated notes issued by GBV

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- A weakening of GEH's credit profile, together with weaker operations, including increased receivable collection period, resulting in the GBV restricted group's total adjusted debt/ EBITDA sustained above 5.0x or EBITDA interest cover of less than 2.0x (FY16: 1.5x)

- Significant increase in refinancing risks

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- Positive rating action is unlikely in the next 18 to 24 months given GEH's credit profile, and the expected asset additions at the GBV restricted group level, which will likely result in no material improvement in credit metrics of the restricted group over the medium term

For GEH

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Any changes to shareholding that adversely affect the company's overall risk profile, including its liquidity and refinancing, risk management policies or growth risk appetite

- Weakening in operational or financial performance of its assets and/ or aggressive investments that are not sufficiently supported by equity, which lead to debt to EBITDA being sustained over 5x and EBITDA interest coverage sustained significantly below 2x.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- No positive rating action is expected in the next 18-24 months because of the expected capex, capital structure and credit metrics.