CRISIL rating of 'Provisional CRISIL AA+(CE)' on Non-Convertible Debentures (NCDs) to be issued by PTC India Financial Services Limited (PFS; rated 'CRISIL A+/Stable/CRISIL A1+') remains on 'Rating Watch with Developing Implications'.
 
The rating is on watch because of the weakened credit profile of one of the identified loans backing the NCD payouts and the longer than initially anticipated time lag, due to operational reasons, in replacement of the loan with higher quality assets. The issuer has informed CRISIL that the replacement process is now expected to be completed only by the second week of May 2020 owing to the operational challenges arising out of the lockdown due to COVID-19 pandemic. CRISIL will monitor the Issuer's ability to complete all the operational processes, including procurement of no objection certificates from all the required bankers, to replace the originally identified loan with assets meeting the pre-defined eligibility criteria within the communicated timelines. The watch will be resolved based on the progress displayed in terms of the replacement process or the credit quality of the underlying loan improves.
 
The NCDs to be issued by PFS will be backed by a partial credit enhancement (PCE) of Rs 116.0 crore, extended by State Bank of India (SBI; rated 'CRISIL AAA/CRISIL AA+/FAAA/Stable/CRISIL A1+'), Debt Service Reserve Account (DSRA) of Rs 45.0 crore built by PFS over the first year, and loan receivables from identified, commissioned, operational, renewable projects with a minimum principal cover of 109%.. Also, the cashflow cover i.e. receivables from the underlying loans for year 3- year 10 shall cover alteast 90% of the scheduled payouts for year 3 - year 10 to the NCDs.
 
The identified loans will be assigned to a bankruptcy-remote special purpose vehicle (SPV) upon occurrence of certain pre-defined trigger events, one of which is a downgrade in the rating of PFS by two or more notches. Post the assignment, the loan receivables will be utilised purely for payment of the NCDs, repayment of drawn PCE, the associated PCE interest and PCE fees, and the cash flows will not flow back to the Issuer until the NCDs are outstanding. Thus, post the assignment, the NCD-holders will have dual recourse to PFS (cash flows from normal operations of the company) and the bankruptcy-remote SPV (to which the identified loan receivables are assigned).
 
Interest is payable on the NCDs on a half-yearly basis and principal repayments are scheduled as equal annual instalments from year 3 to year 10. Based on the t-structure defined, on each payout date, DSRA and PCE will be drawn, to the extent required, if the amounts funded by PFS and the identified loan receivables are not sufficient to make NCD payouts.
   
In the absence of the above structural features, the rating of the NCDs would have been the same as rating of the Issuer.
 
This is a 'Provisional' rating and will be converted into a 'Final' rating on receipt of the following documents:

• Debenture Trust Deed
• Security Trustee Agreement
• Debenture Trustee Agreement
• PCE Repayment Letter Agreement
• PCE Facility Agreement
• Inter Creditor Agreement
• Issuer's confirmation to ICA
• Trust and Retention Account Agreement
• Legal opinion
• Trustee's awareness letter

Additional documents executed for the transaction, if any, should also be provided to CRISIL. A rating rationale/report indicating the conversion of the 'Provisional' rating to 'Final' rating post receipt of all the required final legal documentation will be published on the CRISIL website.
 
Please click on the link below for detailed information on CRISIL's policy on provisional ratings/credit opinions:
 Revision in CRISIL policy for assigning 'Provisional' rating.

For arriving at the rating, CRISIL has analysed the structural features envisaged as part of the issuance. Consequently, in addition to the credit profile of the Issuer, the instrument rating factors in the support from the PCE, the DSRA and cash flows from the identified loans.

Rating Assumptions
To assess the total support provided by the identified loans to the NCD holders, CRISIL has factored in the following:

• CRISIL has assumed correlation of 0.2 ' 0.6 for projects
• Post default recovery rate of 30-80% has been considered

Supporting Factors

• Total support available in the structure

o The NCD-holders have dual recourse to PFS and the cash flows from the identified loans extended by PFS to the special purpose vehicles (SPVs) engaged in renewable (solar and wind) power generation. In case PFS is not able to make the payments to NCD-holders from internal accruals, the underlying identified loan receivables will be utilised to make the payments. Further, DSRA of Rs 45 crore and PCE facility of Rs 116 crore are also available to cover shortfalls (if any) for NCD payouts.
 

• Credit profile of PFS
  • CRISIL's view on the credit profile of PFS factors in strong support from, its promoter, PTC India Ltd (rated 'CRISIL A1+'). It also reflects PFS's comfortable capitalisation and earnings profile. These strengths are partially offset by its exposure to risks relating to asset quality given the challenges faced by the power sector, and its modest market share in the infrastructure financing segment

 Constraining Factors

• Credit quality of the identified loans
  • The underlying projects related to all the identified loans have a track record of at least 1 year of operations post commissioning, an established history of timely debt servicing and stable cashflows. However, there has been a weakening in the credit profile of one of the identified assets on account of payment delays from its sole customer on account of ongoing tariff issue between developers and the Andhra Pradesh discoms. The Issuer is in the process of replacing the affected identified loan with assets meeting pre-defined criteria and has informed CRISIL that the process would be completed by the second week of May 2020.

DSRA of Rs. 45.0 crore and PCE Facility of Rs.116.0 crore would provide liquidity support to the issuance. The available liquidity is sufficient to cover first 2 years of NCD payouts.

Upward factors:

• Introduction of supportive legislations or regulations for covered bonds

• CRISIL has received a draft legal opinion confirming the bankruptcy remoteness of the assigned loan receivables from the Issuer. However, currently, there is no supportive regulatory or legislative framework for covered bonds in the country and judicial precedence on the subject is non-existent.

Downward factors:

• Inability of the Issuer to replace the identified loan with weakened credit quality by second week of May 2020
• A sharp downgrade in the rating of the Issuer
• Non-adherence to key transaction terms envisaged at the time of the rating.

The guarantees provided by the PCE provider is unconditional, irrevocable and cover 20% of the rated amount. Trustee monitored payment mechanism is in place to ensure payment of interest and principal obligation on the rated debt. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of a shortfall in payments by the Issuer and the identified loans.

Based on the eligibility criteria, trigger events and the credit profile of the identified loans, CRISIL has considered multiple scenarios to test the adequacy of the quantum of stipulated credit enhancement. CRISIL believes that the level of credit enhancement is sufficient even under various stress scenarios. While building stress scenarios, CRISIL has assumed deterioration in performance of the issuer and significantly weaker performance of the pool as compared with the base case portfolio performance. CRISIL believes that the instrument will have very high degree of safety regarding timely servicing of financial obligations even in the most likely stress scenario.

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

The key rating drivers of the unsupported rating are detailed in CRISIL's latest rating rationale on debt instruments issued by PFS.

About the Originator
PFS was promoted by PTC, to provide financial services and related products and services to companies in the energy value chain. The company was incorporated in September 2006, and commenced operations in May 2007. PFS is registered with the Reserve Bank of India as an infrastructure financing NBFC. It provides loans (including mezzanine funding) to Infrastructure projects with primary focus on renewable projects along with other projects of distribution, transmission, road under HAM, sewage treatment, ports etc. The company also provides non-fund-based products and services to companies in the power sector.

Key eligibility criteria of the identified loan contracts
1.Overall principal cover to be 109% of the NCD issuance
2.Cashflow cover i.e. cashflow from the underlying loans for year 3- year 10 to be 90% of the payouts for year 3 ' year 10.
3.Asset class, tenure, rating (CRISIL's view) in line with the asset being replaced
4.Commissioned renewable project (wind or solar) with at least 1 year of repayment track record

Details of the Trigger Event
Trigger Event will happen upon occurrence of any of the following
1.Rating downgrade of PFS to CRISIL A- or lower
2.Any withdrawal from DSRA
3.Any utilisation of PCE
4.Bankruptcy, winding up of operations of PFS

Any other information: Not applicable