Fitch Ratings cuts Indian Renewable Energy Development Agency ratings as renewable stress rises

As India's renewable energy space starts showing signs of slowdown and eventual stress, Fitch Ratings has downgraded Indian Renewable Energy Development Agency (Ireda) rating.

The downgrades have been made to Ireda's long-term foreign and local-currency issuer default ratings (IDR) as well as its long-term senior unsecured rating to 'BB+' from 'BBB-'. "The outlook is stable. At the same time, Fitch has downgraded the short-term IDR and the short-term senior unsecured rating to 'B' from 'F3'," said the ratings agency in a statement.

The downgrade follows a downgrade of Fitch's internal assessment of Ireda's standalone credit profile to 'b+' from 'bb-' due to elevated risk in India's renewable-energy sector.

"Our expectations of lower capital adequacy following the adoption of all of the Reserve Bank of India prudential norms from the financial year ending March 2019 (FY19) and Ireda's modest loan loss provision coverage," the agency said.

On November 16, DNA Money had reported that the renewable energy sector, especially solar, could be next in line in becoming a stressed sector, similar to thermal power segment. The sector is already facing funding challenges. To make the matters worse safeguard duty, aggressive bidding, high operational and funding costs and other factors like quality of solar module will only hurt returns.

Until now, the renewable energy sector was financed by banks, Ireda, venture capital funds, among others. However, funds have started to dry up for solar projects, which are put on bid and where execution is taking place.

Fitch has classified Ireda as a government-related entity (GRE) under its GRE Rating Criteria and assigned the company a weighted score of 30 under the GRE factor assessment. This results in the company being rated on a 'top-down minus 1' approach. Therefore, Ireda is rated one notch below the Indian sovereign's long-term foreign and local-currency IDRs of 'BBB-'.

"Our internal assessment of Ireda's standalone credit profile under the GRE criteria takes into account the company's concentrated business model, moderate capitalisation against its high risk appetite and volatile asset quality, which is vulnerable to a sharp deterioration due to the characteristics of the renewable-energy sector. Fitch also recognises Ireda's significant reliance on foreign funding sources and the related market risk this entails," Fitch said.