[The REDD Insight is a daily market comment produced by senior members of the REDD Intelligence newsrooms. The views expressed in this report are solely those of the author(s) and are not necessarily either shared or endorsed by REDD.]
“The opposite of a problem would likely be the correct solution.” — Joey Lawsin
Continuum Green Energy’s planned USD bond may help it address a USD 792m maturity wall in 2027, but the Indian renewable energy producer’s cashflow woes are likely to linger.
Proceeds from the planned new USD 660m nine-year bond will take out the outstanding amount on Continuum Energy Levanter’s USD 561m 4.5% bond due 2027 (Levanter Bond), easing debt repayments for 2027. However, this is likely the entire extent of the benefits from the bond, and it will not help ease tight cashflows at the complex.
Although the new bond will mean a significant decrease in ongoing annual principal repayments, any benefit will be offset by a significant increase in interest expense, leading to the continuation of stretched credit metrics.
The Levanter Bond and Continuum Energy Aura’s USD 453m 9.5% green bond (Aura Bond) mature in February 2027. Coupled with domestic debt maturities, USD 792m in debt comes due in February 2027, according to REDD calculations.
Part of the proceeds from the planned USD 660m bond issue will go to refinancing the outstanding USD 476m left on the amortizing Levanter Bond, bringing down the 2027 requirements dramatically. However, beyond solving for this stacked maturity, the new bond is unlikely to affect CGEL’s credit profile significantly. In fact, it should increase annual debt service requirements at the operational units.
The new bond will be issued by a restricted group of eight units (which the company is calling Restricted Group 2 or RG2) which includes six units backing the Levanter Bond, collectively called Restricted Group 1 or RG1. The planned new issuance reduces annual principal repayments, comprising scheduled amortizations and a mandatory cash sweep, from INR 3.31bn (USD 42.5m at today’s exchange rate) to around INR 1.96bn (USD 23.5m), according to REDD calculations.
However, the benefits from this over 40% reduction in annual principal repayments may not ease cashflow pressures at CGEL due to higher interest expense from the new bond issue (the amortization schedule for the Levanter Bond and the principal repayment schedule proposed for the new bond are shown in the tables below).
If the new bond prices in the low 7% range, as reported, annual coupon payments will be around INR 3.86bn (USD 46.2m). This is more than double the coupon payment under the Levanter Bond being taken out, which stood at INR 1.75bn (USD 20.9m). Overall, annual debt service on the new bond in its first year after issuance will be INR 5.82bn (USD 70m). In comparison, annual debt service on the Levanter Bond would have been INR 5.06bn (USD 60.5m) in the same year, implying an increase of INR 760m (USD 9m) in debt outflow.
While numbers going forward will change given amortization payments, this pattern will not, with annual debt service obligations increasing when the new bond replaces the Levanter Bond. Adding to this increased annual debt service requirement are restrictive covenants proposed in the new bond (also present in the Levanter Bond), which squeeze cashflows needed to service debt outside the new bond (the expected debt service requirements at RG2 for the new bond at different pricing levels can be seen in the table below).
RG2 will likely generate EBITDA of INR 8bn (USD 95.7m) for the financial year ending 31 March 2025, assuming the same run rate as FY24, according to REDD calculations. Of this amount, around INR 5.82bn (USD 70) will be used to service RG2’s debt obligations, leaving a surplus of around INR 2.18bn (USD 26m).
However, the entire surplus of INR 2.18bn (USD 26m) will not be available to service debt outside RG2. Cash can only be upstreamed from RG2 once certain criteria on debt service reserve accounts and fund flow from operation ratios to net debt ratios are met.
Meanwhile, the annual interest payments alone on the Aura Bond are INR 3.4bn (USD 40.7m), higher than the entire surplus of INR 2.18bn (USD 26m) at RG2. The Aura Bond is structurally subordinated to all operational unit debt, and the planned new issuance at RG2. The holdco has no source of cash other than that upstreamed from the operational units, of which RG2 forms a significant part. Entities comprising RG2 contributed INR 7.6bn, (USD 91.8m) or 85.8% of CGEL's consolidated LTM 3Q24 EBITDA of INR 8.9bn (USD 10.7m).
While CGEL’s financial statements do not specify how cash is being upstreamed from the operational units to service Aura debt, RG1’s financial statements for FY24 show that INR 2bn (USD 23.9m) was given by RG1 units as an intercompany loan to unspecified related parties.
Either way, total EBITDA at CGEL on a consolidated basis for LTM 3Q24 stood at INR 8.9bn (USD 10.7m), while interest payments on the Aura Bond alone for the same period were INR 3.4bn (USD 40.7m). CGEL has most likely been funding this gap by raising external debt, according to REDD estimates based on CGEL’s financials, which note that the company has raised additional debt of INR 23bn (USD 280.8m) in LTM 3Q24.
CGEL is eyeing pricing of its RG2 bond on Tuesday (18 June) and existing Aura bondholders should pay close attention. Cash flows available to service the Aura Bond debt from RG2 will be directly related to how the new bond prices.
The company and its bankers are expecting pricing in the low 7% range or around 7.2%, market participants who spoke to REDD said. However, the participants believe that pricing in the mid- to high- 7% range is a fairer reflection of the credit risk, pointing to comparables like Greenko Power II's USD 1bn 4.30% bond due 2028 that is currently trading at around 7%, making pricing in the low 7% area for a nine-year bond unappealing, they added. Another issue that was flagged was the shareholding changing from Morgan Stanley to founders Vikash Saraf and Arvind Bansal, a risk REDD underscored in a 23 April Insight.
This leaves CGEL walking a tightrope. If the bond prices too low, CGEL may find it hard to drum up sufficient investor interest to subscribe to the deal. However, if it prices too high, CGEL could find its tight cashflows under further pressure.