Ind-Ra: Debt Structure and Amortisation Profile to Determine Debt-worthiness of Solar Power Projects

Ind-Ra believes that the Viability Gap Funding (VGF) model for the batch I, phase II of the Jawaharlal Nehru National Solar Mission is prima-facie viable but needs the support of financial engineering techniques to enable timely debt service on these projects. The equipment costs, debt structure and the size of the viability gap funding (VGF) will drive the credit quality of these projects.

Ind-Ra, in its analysis has concluded that the projects under this batch would need a minimum VGF grant of 16% of the project costs (under certain set of assumptions) with an annual declared capacity utilization factor (CUF) of 19% to be able to achieve timely debt service. The optimum debt/equity mix is 69:31 to achieve a break-even debt service coverage ratio of 1.0x. VGF grants below 16% of project costs could be stressed to meet timely debt service.

Besides the construction timeline, the projects would require an amortization period of around 13 years, taking into account the seasonal variations involved in solar projects. Seasonal variations in CUF must form a part of the capital structure analysis in order to achieve success in these models. The tariff of INR5.45/kwh would add to stress unless backed by sizable VGF. Ind-Ra determines the minimal breakeven tariff (which would just about enable it to service debt) to be INR6.50/kwh, in the absence of VGF.

The success of these projects would depend upon the Solar Energy Corporation of India's (SECI) payment track record. Government ownership and its strong linkages with the government help mitigate revenue-counterparty risks. Ind-Ra's full report Financially Engineering the Solar Projects to Shine offers detailed insight into structuring these projects.

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