INDIA SOLAR LIBOR DECISION BRIEF Bankability and Debt Financing for Solar Projects in India © BRIDGE TO INDIA, 2013 1 © BRIDGE TO INDIA, 2013 Illustration by Kavya Bagga DISCLAIMER © 2013 BRIDGE TO INDIA Energy Pvt. No part of this report may be used Ltd. or reproduced in any manner or in All rights reserved any form or by any means without February 2013, New Delhi mentioning its original source. All reports are owned by BRIDGE BRIDGE TO INDIA is not herein TO INDIA and are protected by engaged in rendering professional Indian copyright and international advice and ser¬vices to you. BRIDGE copyright/intellectual property laws TO INDIA makes no warranties, Contact underapplicable treaties and/or expressed or implied, as to the BRIDGE TO INDIA Pvt. Ltd. conventions. The user agrees not to ownership, accuracy, or adequacy of N-117, Panchsheel Park export any reportinto a country that the content of this product. BRIDGE New Delhi 110017 does not have copyright/intellectual TO INDIA shall not be liable for any India property laws thatwill protect BRIDGE indirect, incidental, consequential, or TO INDIA’s rights therein. punitive damages or for lost revenues or profits, whether or not advised of www.bridgetoindia.com BRIDGE TO INDIA hereby grants the possibility of such dam¬ages or www.bridgetoindia.com/blog the user a personal, non-exclusive, losses and regardless of the theory of Follow us on non-refundable,non-transferable liability. license to use the report for research purposesonly pursuant For further enquiries, please contact: to the terms and conditions of this Jasmeet Khurana agreement. BRIDGE TO INDIA retains [email protected] exclusive and sole ownership of each report disseminated under thisagreement. The user cannot engage in any unauthorized use, reproduction,distribution, publication or electronic transmission of this report or theinformation/forecasts therein without the express written permission of BRIDGE TO INDIA. © BRIDGE TO INDIA, 2013 CONTENTS 1 Introduction 01 2 Lender’s view – risks and mitigation strategies 03 2.1 Risks related to long-term payment security 04 2.1.1 Power off-taker risk 04 2.1.2 Regulatory risks 07 2.2 Risks related to long-term plant quality and power generation 09 2.2.1 Resource data risk 09 2.2.2 Technology risks with regard to quality and performance 10 2.3 Short-term, project execution risks 13 2.3.1 Permitting and construction risks 13 3 Borrower’s view – structuring debt finance 16 3.1 A typical project financing structure in India 16 3.2 A typical project financing timeline 17 3.3 Types of debt finance 18 3.3.1 Project financing or non-recourse financing 18 3.3.2 Limited recourse financing 18 3.3.3 Refinancing 18 3.3.4 Construction finance 18 3.4 Role of bridge finance/construction finance 19 3.5 Sources of debt finance 21 3.5.1 Indian commercial banks 21 3.5.2 Non-banking financial companies 21 3.5.3 Export Credit Agencies/Investment insurance agencies 23 3.5.4 Development finance institutions 24 4 Other tools for debt financing 26 4.1 Currency hedging 26 4.2 Debt syndication 27 5 Financing documentation 28 6 Outlook 29 7 Expert’s view 30 7.1 GeoModel Solar: What makes a solar resource estimate bankable? 30 7.2 Enerparc: Bankability of solar projects – The need to look beyond financial metrics 31 8 Annexure 32 8.1 Glossary of terms 32 © BRIDGE TO INDIA, 2013 LIST OF Figure 1 State-wise net internal revenues for 2009-10 05 FIGURES (in ` Million) Figure 2 Structure of a typical State Electricity Board 06 Figure 3 CUF based on plant data from Gujarat (January to April 10 2012) 16 Figure 4 Typical cash flows and contracts managed through the SPV Figure 4 Typical project cash flows on a timeline 17 Figure 5 Example of cash flows of a project availing construction 20 loan Figure 6 Five year valuation of the Indian rupee against the US 26 dollar © BRIDGE TO INDIA, 2013 KEY FINDINGS 1. According to estimates, debt bridge financing plays a key role in claims worth more than ` 2 trillion letting developers complete their (€ 30 billion/$ 40 billion)1 are projects on time. pending in debt recovery tribunals. 8. Bridge finance can be arranged Debt recovery and the legal through short-term construction enforceability of claims for any loans from financial institutions, type of non-recourse debt in India suppliers’ credit and pre-financing remains a key risk for the lenders. by EPC companies. 2. On the intermediate level, lenders 9. First movers in terms of financing have two main concerns: the first is solar projects in India have been the limited availability of irradiation Bank of Baroda, Axis Bank, ICICI data, which forms the basis for Bank, State Bank of India, IDBI projecting future revenues. The Bank and Yes Bank. second is the strength of public 10. Prominent non-banking financial power purchasing agreements companies (NBFCs) that are (PPAs) due to the weak financial open to financing solar projects health of India’s public utilities. include: L&T Infrastructure 3. According to industry sources, Finance Company (subsidiary of the margin of error for irradiation L&T Financing Holdings), Power data at specific locations could Finance Corporation (PFC), be as high as 10% and can be a Mahindra Finance, IDFC, IL&FS, significant risk from a lender’s SBI Capital Markets and Indian perspective. International Renewable Energy Development lenders insist on P90 exceedance Agency (IREDA). probability for irradiation data. 11. The US EXIM bank has been the 4. Majority of SEBs in India have most active Export Credit Agency negative net internal revenues and (ECA) in the Indian solar market. the situation is getting worse. The According to a statement in July distribution utilities’ cumulative 2012, the US EXIM bank has losses rose to ` 1.9 trillion (€ 29 approved solar project financing billion/$ 38 billion) in FY-2011 from for ` 16.5 billion (€ 250m/$ 330m). ` 1.22 trillion (€ 18 billion/$ 24 12. IFC, a member of the World Bank billion) in the year before. This puts Group, is one of the most actively the PPAs signed by them at risk. involved Development Funding 5. A preliminary review of the power Institutions (DFIs) in India. It has production data from January to provided financing for projects by 2 April 2012 by BRIDGE TO INDIA developers such as Green Infra, shows that in spite of similar Mahindra Solar, Azure Power and irradiation and temperature SunEdison India. conditions, while most of the plants 13. ADB provides financing support have a CUF of around 20%, a few under the India Solar Generation plants have achieved a CUF as high Guarantee Facility (ISGGF), under as 25% and as low as 14%. its Asia Solar Energy Initiative 6. Unavailability of non-recourse (ASEI) to promote the development financing is a critical hurdle in the of solar energy in India. Currently, expansion plans of developers as two commercial banks have they cannot continue to accumulate been approved by ADB as eligible recourse on their balance sheets. partners: L&T Infrastructure 7. Due to liquidity shortages, Finance Company Limited (India) short timelines and delayed and the Norddeutsche Landesbank disbursements of debt amounts, (abbreviated Nord/LB, Germany). --------------------- 1 € 1 = ` 65; $ 1 = ` 50 2 Refer to the July 2012 edition of the INDIA SOLAR COMPASS to read more © BRIDGE TO INDIA, 2013 1. OVERVIEW Solar projects in India still struggle to India’s public utilities. On account raise debt finance. So far, only a small of these risks, the market is percentage of projects have attained slowly maturing: more on-ground non-recourse financing. Most have measuring stations and actual worked with either limited recourse generation data from existing Lenders have concerns or full recourse finance. Banks that plants provide a stronger set of have in the past provided non-recourse data. With respect to the strength with debt recovery and financing are either Indian commercial of PPAs, payments are sometimes the legal enforceability banks or international lenders with backed by guarantee funds and of claims in India in a development mandate. There are sometimes passed on to the several reasons why non-recourse private sector (through Renewable general. This is a finance is difficult to obtain. They relate or Solar Purchase Obligations). concern that extends to three layers of the market: For Renewable Energy Certificates to any project-related (RECs)3 the main questions hover 1. On the macro level, lenders have around the enforcement of Solar finance in India. concerns with debt recovery Renewable Purchase Obligations and the legal enforceability of (RPOs) and Solar Purchase 4 claims in India in general. This Obligations (SPOs in Tamil Nadu) , is a concern that extends to any which create the demand. The project-related finance in India. project promoter will need to be Even cross-defaulter clauses of conservative on yield assessments converting debt into equity only and evaluate the off-take and REC have a limited appeal. The best options very carefully. way for a project promoter to 3. On the project level, there can be reduce this concern is through a projects that are simply not well strong company reputation and developed. A well- developed banking relationship as well as project usually starts from the through the actual track-record perspective of the debt provider of debt repayment and future (bankability) by identifying and plans and debt requirements (the mitigating risks. The second step is On the intermediate larger the risk to future business proving viability to the lenders. Our of being labeled a “defaulter”, level, with respect report will primarily focus on steps the higher the incentive to repay for improving the bankability of the to the Indian solar the debt).