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M&A activity gains pace as debt deals decline

Like other infrastructure sectors, the renewable energy sector has been deeply impacted by the Covid-19 pandemic. During the initial lockdown days, under-construction projects faced issues like supply chain restrictions, unavailability of labour and lack of approvals, while operating projects suffered due to the absence of skilled manpower. This led to a loss in revenue and significant delays in project commissioning, although the situation has started improving with construction and operation activities slowly getting back on track. However, the financing activity has not picked up even after three quarters of the year have gone by, with a severe decline in debt deals compared to the past few years.

Renewable power financing has already been suffering due to various investment risks like delayed payments from discoms, threat of tariff renegotiation, land acquisition issues and transmission unavailability. On a macro level, there is a liquidity crunch owing to a weak economy marked by the depreciation of the Indian rupee vis-à-vis the dollar. Thus, most public and private banks are wary of lending to renewable power projects in this high-risk, low-return regime. The state of the banking sector, which had been struggling pre-Covid, has only become worse due to the pandemic. Moreover, there have been uncertainties regarding the continuation of unutilised credit lines by lenders. Thus, high debt, liquidity crunch and unviable tariffs have led many companies to rethink their renewable energy plans with a few even opting to exit the sector, leading to a flurry of acquisition activity. Renewable Watch highlights the key financing deals announced in recent months…

Growing pace of acquisitions

Equity financing has been one of the preferred routes for raising capital for companies in the renewable energy space and has become the lead mode of funding. Companies with deeper pockets and high-risk appetite are looking to acquire well performing assets to expand their portfolios, while others are willing to sell and exit the highly competitive renewable energy market. As a result, a favourable merger and acquisition (M&A) environment has been created. In fact, even between March and September 2020, Renewable Watch has tracked at least 12 major acquisition and equity deal announcements across the wind and solar segments:

  • Yinson Holdings Berhad, through its subsidiary Yinson Renewables (S) Pte Limited, acquired a 37.5 per cent equity stake in the solar development firm Rising Sun Energy in March 2020 for a sum of Rs 554 million along with Rs 600 million funding to repay certain outstanding liabilities of the developer. Yinson Holdings Berhad has decided to acquire an additional 57.5 per cent stake in Rising Sun Energy for Rs 1.1 billion as per an announcement in August 2020.
  • In one of the biggest announcements made in April 2020, a binding pact was signed between Senvion India and Alfanar to offload the former’s manufacturing operations in India. The Indian unit of Senvion has 500 MW of manufacturing capacity.
  • In April 2020, the cash-strapped Infrastructure Leasing and Financial Services (IL&FS) sold its 100 per cent stake in IL&FS Wind Power Services Limited (IWPSL) to the Japan-based Orix Corporation for Rs 60.5 million. Further, according to a recent announcement, Orix acquired over 20 per cent of Greenko’s shares worth $980 million by selling its seven wind power projects aggregating 873 MW to Greenko.
  • In July 2020, Hindustan Zinc, a subsidiary of the Vedanta Group, announced its plans to sell its wind energy assets of 273 MW, valued at around Rs 15 billion. The company has listed them as non-core assets. The wind projects are located across the states of Rajasthan, Gujarat, Maharashtra, Karnataka and Tamil Nadu and have PPAs with the respective state discoms.
  •  In July 2020, BP announced that it will invest $70 million in India’s Green Growth Equity Fund (GGEF). With this, BP will become a limited partner in the GGEF and get representation on its advisory committee. It will be able to co-invest in projects with the GGEF, whose investments come from the National Investment and Infrastructure Fund as well as the UK’s Department for International Development. The fund is managed by EverSource Capital, a joint venture between Lightsource BP and Everstone Capital.
  • In July 2020, the UK-based NextEnergy Capital Limited acquired a 27.4 MWp solar project in Odisha from Germany’s IBC Solar Energy GmbH. This deal is NextEnergy Capital’s first acquisition in the Indian market and was purchased through its third institutional solar fund, NextPower III.
  • Ayana Renewable Power Private Limited acquired a 100 per cent equity stake in two solar power projects with a cumulative capacity of 40 GW in August 2020. Developed by First Solar, the two projects are located in Karnataka and have been operational for over two years.
  • In August 2020, the UK-based fund Actis closed its acquisition of 400 MW of assets from Acme for a consideration of Rs 2.5 billion.
  • Acme sold 100 MW of solar assets to Petronas, through its Indian arm Amplus Energy Solutions, in September 2020. The 100 MW solar power capacity is located in Karnataka’s Pavagada Solar Park and was developed under the National Solar Mission with a tariff of Rs 4.79 per kWh. The capacity was commissioned in 2018. The deal has been reported to be valued at around Rs 8 billion.
  • In September 2020, the RattanIndia Group sold 306 MW of solar assets to Global Infrastructure Partners for an amount of Rs 16.7 billion. The portfolio of assets included ground-mounted solar projects with a cumulative capacity of 297 MW spread across Pavagada in Karnataka, Katol in Maharashtra, Bhadla in Rajasthan, and Allahabad and Bareilly in Uttar Pradesh, and 9 MW of rooftop solar projects spread across 10 cities.

Slowdown in debt financing

Most of the debt financing in the solar space is in the form of loans. These loans are provided by banks, international financial companies, multilateral financial entities and non-banking financial institutions. However, debt deals have been fewer in number as compared to M&As. In March 2020, Fourth Partner Energy received a loan of Rs 5 million from Grameen Impact India, a non-banking finance corporation registered under the Reserve Bank of India (RBI). The company will use the funds to implement its Power@1 programme at the Madras Diabetes Research Centre in Tamil Nadu.

Similarly, in April 2020, ZunRoof, an Indian start-up in the rooftop solar segment, received Series A funding of $3 million from Godrej Investment Office. This is the second round of investment by Godrej after its $1.2 million investment in a pre-Series A round in April 2019. Fourth Partner Energy raised about Rs 1.12 billion in debt funding from Swiss asset manager responsAbility in July 2020. This was the third round of funding given by responsAbility through its climate finance funds, while the first two rounds of financing were closed in 2016 and 2017. The funds received will be used for the construction of new assets across Fourth Partner’s distributed solar and open access portfolios.

In another major development, the Asian Development Bank (ADB) has signed a long-term loan agreement with ENGIE worth Rs 4.66 billion. As part of the agreement, the funds will be used to develop and operate a 200 MW solar project in Gujarat. ADB, along with another international lender, will provide the entire debt required for developing the project. ENGIE’s special purpose vehicle, Electro Solaire Private Limited, will implement the project.

The way forward

While conventional financing instruments like debt may have seen a decline in recent months, alternative options are emerging, through which developers can finance their projects. The most popular option is green bonds. ReNew Power raised bonds worth $450 million in January 2020. Other companies have also planned large issuances. These include Azure Power Solar Energy’s plans to issue a green bond offering of $350 million and Urja Global Limited’s plan to issue green bonds of up to $500 million to finance its renewable energy projects and expand its electric vehicle business. Further, Adani Green Energy Limited plans to raise up to $12 billion by selling green bonds over the next four to five years. The company expects to raise $2 billion-$3 billion annually from the sale of these green bonds. The sale of green bonds is likely to start in May 2021.

Another financial instrument that has generated a buzz is the Infrastructure Investment Trust (InvIT). Recently, Tata Power announced its plans to launch a renewable InvIT by March 2021, and its entire renewable portfolio of 2,500 MW operational and 600 MW of under-construction renewable projects will be moved into it. With this, the company aims to restructure its renewable energy business into an InvIT as a divestment measure along with the sale of its non-core assets. Further, many companies are considering IPOs as a preferred way of raising capital to fund their upcoming capacities. Moreover, solar municipal bonds, which are issued by municipal agencies, are also being explored to finance rooftop solar projects. They can bring down costs and make rooftop projects financially viable for a wide range of consumers.

Meanwhile, the government is making efforts to improve the financing situation in the renewable sector. Recently, the RBI has revised its priority sector lending guidelines, giving an impetus to renewables. In addition, a discom bailout package has been announced, which will help in ensuring timely payment of dues to developers. This, in turn, will build the confidence of lenders and investors in renewable energy projects.

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