State power utilities’ “insensitivity” to project debt service commitments and delay in making payments are plaguing renewable energy projects, India Ratings and Research today said.
The Centre’s initiative — UDAY scheme — looks to address the cash flow strain on distribution companies through transfer of debt load to states.
“However, until the scheme gathers further momentum and meaningfully bears any fruit for the sector, renewable energy projects are compelled to tide over the elevated risk of liquidity strain,” India Ratings and Research (Ind-Ra) said in a statement.
Against the backdrop of several developers embarking on capital market transactions, counterparty delays could not only jeopardise bond potential issuances, but erase the confidence of stakeholders, it said.
“This is especially in view of growing interest of developers to tap the capital market and investors’ penchant for RE (renewable energy) bonds. Also, at this time when the masala bond and dollar bond market is fledgling, a default on a domestic bond may prove costly and could skew risk spreads,” the rating agency said.
“Counterparties’ timely payments are inevitable to nurture the nascent non-recourse capital market debt instruments. Any event of default on the capital market instruments or invocation of a security/credit enhancement would have an adverse impact on the government’s effort in deepening infra bond markets,” the statement added.
The debt structure of RE bonds includes a debt service reserve, equivalent to the maximum of six months of debt service obligation to guard against unforeseen events. Despite robust structural features, the continued strained liquidity has dented projects’ standalone credit quality.
Maharashtra utilities are a new addition to the league of unreliable utilities, not only on the count of rising receivables but due to their unwillingness to sign up for energy sale agreements.
Although the receivable periods may vary, Tamil Nadu and Rajasthan state utilities’ uneven payment records weigh heavily on projects’ risk profile. On the contrary, the newly-formed Andhra Pradesh and Telangana state utilities not only pay renewable energy project developers on time but claim the rebate delineated in the power purchase agreements.
Although the direct impact of delayed payments will be apparent on project liquidity, the ultimate impact could be on lenders if the situation worsens.
Increasingly, the historical payment record appears to be unreliable and enhances the need for a working capital line higher than the historical average receivable days of projects.
“However, the zeroing down on the size of the working capital line has become difficult. In many cases, the credit profile of RE projects is constrained by the weak financial health of the counterparties rather than operational and supply related risks,” it said.