The project finance transaction (hereinafter, PFT) assumes the placement of two rated tranches (class A, class B) and one unrated tranche (class C).
- The expected credit rating of the senior tranche of planned structured collateralized notes (hereinafter, structured notes, or notes) reached eA+(RU) due to the credit support provided to the senior tranche by two subordinated (junior) tranches, as well as the structural features of the transaction.
- The expected credit rating of the mezzanine tranche of planned structured collateralized notes reached eBBB+(RU) due to the structural features of the transaction and high recovery rates in the case of default.
ACRA has assigned the expected credit rating of eA+(RU) to the planned class A structured collateralized notes with coupon payment at a rate linked to the LGO2 index calculated by the trading system administrator when determining the tariff for capacity. Maturity date: February 15, 2031, issue volume: RUB [4.7] bln.
ACRA has assigned the expected credit rating of eBBB+(RU) to the planned class B structured collateralized notes with coupon payment at a rate according to the LGO index calculated by the trading system administrator when determining the tariff for capacity. Maturity date: February 15, 2031, issue volume: RUB [0.9] bln.
1 Full name in accordance with the decision to issue: structured documentary interest-bearing non-convertible notes collateralized by monetary claims to the bearer with mandatory centralized storage.
2 LGO – the average yield of long-term government obligations used in calculating the price of capacity for power suppliers.
SFO RuSol 1 LLC (hereinafter, the Issuer) plans to issue the structured notes in order to refinance bank loans issued for the construction of two solar power plants (SPP) in the Astrakhan region (Project company No. 1 and Project company No. 2, hereinafter, the Project Companies) as part of Government Ordinance No. 449, dated May 28, 2013, (as amended on September 27, 2018) “On stimulating renewable energy sources in the wholesale market of electric energy and capacity.”
The Issuer plans to issue [three tranches] of structured notes with a total volume of RUB [5.7] bln in order to provide the Project Companies with loans collateralized by the following assets:
- 100% of the Project Companies’ authorized capital;
- Receivables on power purchase agreements (hereinafter, PPAs);
- Pledged receivables under bank account agreements of the Project Companies (that revenues of the Project Companies are credited to);
- Pledged movable property of the Project Companies;
- Pledged receivables under operating service agreements;
- Pledged receivables under property insurance agreements of the Project Companies covering the SPP book value with the appointment of the Issuer as the beneficiary, as well as pledged receivables under these agreements in favor of the Issuer.
As part of the PFT, the Issuer, Project Companies, and Operator have entered into a direct agreement stipulating that the Operator will continue to provide operational services according to the terms of the current contract.
The notes will be collateralized by the Issuer with (1) pledged receivables with respect to accounts assigned by the Project Companies to the Issuer as part of its loans and (2) property of the Project Companies provided to the Issuer under loan agreements, as well as pledged receivables under the Issuer's bank account agreement.
The Issuer uses cash flow from proceeds under the loan agreements for coupon payment and repayment of the nominal value of the issued notes.
The key risk of this PFT is the non-performance of contractual obligations under the loan agreements between the Issuer and Project Companies. ACRA has based its rating analysis on a wide range of quantitative and qualitative factors, including:
Key rating assessment factors
The assets are not exposed to construction phase risks. The production assets consist of a fully constructed and operational solar park in the Astrakhan region, which is distributed between the two companies and has a total installed capacity of 30 MW:
- Project Company No. 1 — SPP “Zavodskaya,” installed capacity of 15 MW (commercial operation began in September 2017);
- Project Company No. 2 — SPP “Promstroimaterial,” installed capacity of 15 MW (commercial operation began in May 2018).
All permits and certificates required by legislation for the sale of electricity and capacity in the wholesale market for electricity and capacity (the WMEC) as a generating facility operating based on renewable energy sources (RES) have been obtained.
- Regulatory support in the form of a set regulated electric capacity tariff (more than 93% of total revenues) as part of the state RES support program.
The predictability of incoming cash flow in this PFT is guaranteed by signed PPAs (qualified generating facilities operating based on RES). These PPAs are long-term contracts with residual maturities of more than 10 years concluded between the power generator and the major players of the WMEC for the purchase of power at a state-regulated tariff. The tariff is formed in such a way that during the term of the contract investors are fully reimbursed the amount of invested capital at the established rate of return. This takes into account the compensation of the Project Companies’ operating costs and reimbursement of property and profit taxes.
- Independent long-term PPAs for each Project Company valid until November 30, 2030.
According to project documentation, if one of the Project Companies defaults, a cross-default occurs under the loan agreements, which may represent a default event on the transaction. However, the second Project Company will continue to operate and may therefore be a source of recovery.
- Diversified pool of buyers with high credit quality.
The Project Companies produce electricity and capacity for organizations operating in the first price zone of the WMEC (more than 250 major consumers of electricity in Russia, including enterprises in the Astrakhan region, for example PJSC “Astrakhan Power Company,” and other regions in the European part of Russia and the Urals). In addition, each buyer in the wholesale market, as part of its obligation to purchase power, must enter into a contract for the purchase of a certain share of RES power proportional to the volume of its peak electricity demand3.
All electricity and capacity generated is supplied to Russia’s unified energy system, where buyers consume the necessary volume. Therefore, payment obligations on electricity and capacity generated by the SPPs are distributed among the buyers of the first price zone.
The power sold under PPAs is paid for by consumers in priority order, which eliminates the possibility of generated power not being sold. This minimizes the market risks of the Project Companies, as well as demonstrates their strong competitive position throughout the amortization period of the rated debt. Moreover, the Project Companies should be able to maintain their stable positions in the long term (PPAs cover the notes’ maturity).
- The operation period of the production assets significantly exceeds the life of the PFT (10 years).
According to the technical advisor’s opinion, the probability of the solar modules failing within the established warranty period of 25 years is minimal provided the manufacturer's requirements on the operating conditions are met.
- Reliability and approval of the technologies and equipment in use.
The technologies and equipment are widely used in the construction and operation of solar power plants around the world. According to ACRA, this significantly minimizes the risk of the Project Companies failing to meet the power generation (output) objectives and the subsequent decrease in cash flow in this PFT.
- Interest risk is partially reduced, as the coupon payment is linked to the LGO index, which is one of the components in the electric power price.
In its rating analysis, ACRA conducted a number of stress tests to assess the level of the discrepancy between the Issuer's assets and liabilities.
- The interests of the noteholders are protected through the use of the following mechanisms in the structure of the PFT:
(1) Pledge of all production assets and rights under all contracts within the project;
(2) Restrictions on attracting financing that would lead to increased debt for the Project Companies, as well as on dividend payments;
(3) Debt service reserves at the SPV level (4.7% of the nominal value of the rated tranches), as well as a mechanism to retain excess profits at the Project Company level, ensuring that the debt service coverage ratio (DSCR) is above 1.2x in ACRA’s base case scenario.
Moderate value of the main financial indicators of the Project Companies.
- In ACRA’s base case scenario, the minimum annual average DSCR is 1.2x while the annual average DSCR is 1.24x. These figures are considered low (ACRA accounted for this when determining the assessment score for this factor) despite the fact that they comply with the Methodology for Assigning Credit Ratings to Project Finance Instruments and Obligations on the National Scale for the Russian Federation. ACRA believes that the high level of cash flow predictability, the technical advisor’s opinion confirming the reliability of the technological solutions used and the ability of Project Companies to comply with the requirements of PPAs, and the availability of a Backup Operator significantly reduce the level of financial risk.
- The minimum average annual DSCR reaches the break-even point (1.0x) if the revenue of the Project Companies decreases by 13% (the safety margin for this indicator relative to the growth of operating costs is more than 50%). However, ACRA believes that such a scenario is possible only if operational risks materialize and the Project Companies fail to meet generation objectives, i.e., deviations in the “installed capacity utilization factor” (ICUF) by 25% or more from the established limit for SPPs at 14%. According to the technical advisor, this is extremely unlikely.
Low assessment of covenant package quality.
The Project Companies have to adhere to the following financial metrics:
Net debt/EBITDA of no higher than 5x. There are no limitations on maintaining a minimum DSCR (according to ACRA’s methodology, the standard level of this covenant should exceed 1.05x). In ACRA’s opinion, a total absence of this trigger is usually associated with projects of a relatively low credit quality. ACRA took this factor into account when modeling the transaction, which was then taken into account when setting the assessment score for this sub-factor.
- Relatively stringent output requirements provide for a reduction in the price of power in the case of non-compliance with established standards (if the ICUF deviates by 25% or more from the 14% threshold for the SPPs, which ACRA views as unlikely in the base case scenario), and also a regime of deductions and fines that is burdensome for the Project Companies (if insufficient power is supplied under the PPAs, the Project Companies are required to pay a fine equal to 25% of the cost of the power that they failed to supply). ACRA took this into account when setting the assessment score for these sub-factors.
- Instead of being concluded for the entire life of the PFT, the contract with the Operator is automatically extended on an annual basis. ACRA considers that contracts with key counterparties are more reliable when they are concluded for the entire project life, and that these PFTs enjoy a higher degree of financial stability should stress scenarios materialize. Nevertheless, ACRA believes this risk is partially mitigated by the contract with a Backup Operator that is valid until November 30, 2030.
- It is not possible to make buyers cover higher operating costs by increasing power supply tariffs as the terms of the PPAs stipulate that operating costs may only be indexed at the rate of inflation. ACRA took this into account when setting the assessment score for this sub-factor. However, the resilience of the project exceeds 50% in the event of an increase in operating costs in ACRA’s minimum annual DSCR stress scenario.
- Limited statistics on SPV defaults in the Russian market and the absence of debt recovery precedents (as per legal opinion) mean that the legal environment would be uncertain in the event of Issuer default.
- Payments for the class A and B notes are formed according to a fixed repayment schedule. However, obligations under the class B notes are repaid using the cash flow remaining after the repayment of obligations under the class A notes. A default will not occur if the size of regular payments of part of the nominal of the class B notes is at least 80% of the estimated value of the payment for any coupon period. Despite this, ACRA’s assigned the rating based on the condition that 100% of the nominal of the class B notes is repaid no later than the date of complete redemption of the notes.
The Issuer is a bankruptcy-remote special purpose vehicle operating in accordance with the requirements of Federal Law No. 379-FZ, dated December 21, 2013, “On amending certain legislative acts of the Russian Federation.”
The expected credit ratings reflect ACRA’s opinion on the potential expected losses for investors by the notes’ legal maturity. ACRA carried out the analysis in two stages as per the Methodology for Assigning Credit Ratings to Project Finance Instruments and Obligations on the National Scale for the Russian Federation. In the first stage, ACRA analyzed the credit quality of the Project Companies4. In the second stage, the results of the analysis were used as inputs to model the structure of the Issuer’s obligations and determine expected losses for the rated notes. This took into account the influence of credit quality support mechanisms, projected loss recovery, and other factors that influence the distribution of cash flows in the PFT.
4 According to Clause 2.2 of the Decision on Issue, the recognition of Project Companies as bankrupt and the opening of bankruptcy proceedings against them leads to the occurrence of a “write-off event,” meaning the right of the noteholders to receive the nominal value of the notes depends on the occurrence or non-occurrence of project default (the full definition of default is given in the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities).
The PFT assumes the placement of two rated tranches of notes (class A and class B) and one unrated tranche (class C).
- The issue structure employs a subordination mechanism where the priority of fulfilment of obligations under the class A notes is determined by their seniority compared to the Issuer’s obligations under its class B and class C notes, which are subordinated in relation to the class A notes. The total volume of credit support for the class A rated notes is formed at the expense of tranches B and C, and amounts to 18% of the total volume of the initial issue.
- A uniform procedure for distributing funds (waterfall payment) for the payment of coupons and the nominal value of notes has been established.
- Payments for the class A notes are formed taking into account the repayment schedule, while payments for the class B notes are formed in accordance with available funds (but no less than 80% of the issue volume).
- Despite the lack of separate waterfall payments, the seniority of the class A notes stems from the fact that the payment of coupons and the nominal for class A notes is higher priority than the payment of coupons and the nominal for the class B and C notes.
- The class C notes are not fully subordinate to the class B notes due to the waterfall payment’s inclusion of coupon payments for the class C notes, which are scheduled for the period between coupon and nominal payments for the class B notes.
- A PFT default is regarded as (1) declaring Project Companies bankrupt and opening bankruptcy proceedings against them, which, according to the terms of the PFT, will also lead to the occurrence of a write-off event5, and (2) failure to fulfill the following obligations:
5 See Clause 9.2.2 of the Decision on the Issue.
- Coupon and nominal payment for the class A notes;
- Payment of the coupon and no less than 80% of the estimated nominal value of the class B notes. However, this will only be considered a default on the class B notes.
- In the event of a default, investors must make a decision (via the representatives of the noteholders) on whether to sell the pledged assets in favor of the SPV.
- Additional credit support is provided to the notes by a debt service reserve fund (DSRF) created by the Issuer and held on its pledge account at PJSC Sovcombank (A+(RU), outlook Stable), which matches the size of coupon payments for the class A and B notes and is subject to subsequent amortization by the Issuer throughout the life of the PFT.
- The DSRF can be used if income from the loan agreements signed with the Project Companies is insufficient to cover all the Issuer’s expenses at all stages of the waterfall payment. The DSRF is not intended to finance the expenses of the Project Companies.
- When simulating cash flows for the PFT, ACRA predicted the value (in percent) of the spending of the reserve fund in each settlement period.
- As part of the rating analysis of this PFT, ACRA, along with the form of the issues’ registration as structured notes, primarily considered the structure and sources of risk that affect the probability of default and the recovery rates for these notes.
- The right of the noteholders to receive the nominal value of the notes (the outstanding part of the nominal value), indicated in Clause 9.2.2 of the Decision on the Issue, depending on the arbitration court deciding whether to declare Borrowers bankrupt fully corresponds with the standard definition of a default event, given in the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities, as it accurately reflects the risks of borrower bankruptcy.
Potential rating change factors
A positive or negative rating action may be prompted by the following events:
- Changes to the PFT’s financial metrics listed in the Methodology for Assigning Credit Ratings to Project Finance Issuers, Instruments and Obligations on the National Scale for the Russian Federation;
- Changes to macroeonomic conditions not envisaged by the stress scenarios used in the rating analysis;
- Legislative amendments that may significantly impact the transaction;
- Changes to the credit quality of the long-term creditworthiness of key PFT counterparties that cannot be replaced.
The expected credit ratings have been assigned on the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Project Finance Instruments and Obligations on the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The expected credit ratings have been assigned to the structured collateralized notes planned for issue by SPV RuSol 1 LLC for the first time. ACRA expects to assign the definitive credit ratings within 90 days following the publication date of this press release.
The expected credit ratings have been assigned based on the data provided by SPV RuSol 1 LLC, information from publicly available sources, as well as ACRA’s own databases. In ACRA’s opinion, the information used in the rating analysis was reliable and sufficient for the application of the methodology.
The expected credit ratings are solicited, and SPV RuSol 1 LLC participated in the rating process.
ACRA provided no additional services to SPV RuSol 1 LLC. No conflicts of interest were identified in the course of the credit rating process.