Fitch Ratings-Chennai/Mumbai/Singapore-12 May 2009: Fitch Ratings has today assigned an expected 'B(ind)' rating to Sathyam Power Private Limited's (SPPL) long-term bank loans aggregating INR358.4m. The Outlook is Stable.
SPPL, formerly Sathyam Sales Pvt Ltd., was a trading and investment company which changed its business objective in December 2005 to include the generation and sale of electric power to take advantage of the state government's favourable policy regime; SPPL is embarking on a 10MW biomass power plant in the state of Rajasthan. SPPL's main sponsors are Surya Chambal Power Ltd (SCPL, 26%), Finanzhaus Burkle & CO, Zurich (FB&C, 24%) and Focal Energy Holdings Ltd. (FEHL, 50%). SCPL is an independent power producer (IPP), while FB&C is a financial investor; FEHL, incorporated as an investment company, aims to develop a portfolio of income generating assets energy and infrastructure in India.
SPPL's rating is constrained by significant completion risk leading to potential time and cost overruns, the sponsors' limited track record, uncertainty with respect to availability and pricing of fuel (biomass) and financing risk. A 20-year power purchase agreement (PPA) with the state-owned Rajasthan Vidyut Prasaram Nigam Limited (RVPNL) mitigates offtake risk on project completion and offers some comfort to SPPL's credit profile.
Fitch observes that the project is in a very nascent stage of implementation. While land is reportedly in the company's possession and the loan agreement for term loans to finance the debt component of the INR542.9m project has been executed, firm arrangements for civil construction and equipment supply (to be sourced on an engineering, procurement and construction (EPC) basis) have not been concluded. A letter of intent (LoI) has been issued to Walchandnagar Industries, the EPC contractor. Lenders require 50% of sponsor equity to be infused before loan disbursement can commence. The agency will assign final ratings upon review of the EPC contract and equity infusion.
The project will use suitable agrowaste as primary fuel and lignite/coal as supplementary fuel (to a maximum of 30% in drought years). A study commissioned by the company suggests availability of sufficient fuel in the project catchment area, although mustard being a seasonal crop, will need storing for catering to the lean period requirement. Alternative arrangements for coal supply, in case of a deficiency in availability of primary fuel, have not yet been made. Should such a need arise, the cost of coal as a source of fuel can also negatively impact project cash flows.
A possible escalation in capital costs, contingency provision of less than 5% together with proposed terms of debt that envisage variable interest rates heighten the financial risk. Coverage metrics are weak and exhibit limited resilience to a variety of stress tests that Fitch performed.
Although the assured offtake by virtue of the PPA is a rating positive, Fitch notes that fuel price inflation is not a pass-through in the tariff structure. Furthermore, the tariff notified for biomass power plants in Rajasthan is higher than the price at which most large coal-based plants would be able to supply electricity; however, given the power deficiency and the state's policy dispensation, the likelihood of offtake for SPPL's power being reduced is relatively low.
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