Meghraj Capital Advisors Private Limited

9th June 2016

Infrastructure Consulting I Mergers & Acquisitions I Private Equity I Capital Markets

Rakesh Jha

Role of Credit Risk Guarantee Facility in Result Based Incentive model for Distributed Generation Projects

2

Meghraj Group

Founded by late Mr. Meghji Pethraj Shah. Early 1970s headquartered in the British Isles

Offices

Meghraj Group is an international investment banking, fiduciary services and infrastructure

(Urban & Power) and real estate consulting organisation.

Power Consulting- Generation, Distribution, Regulatory, RE, Energy Efficiency

RE Experience

Off-Grid

– Credit Risk Guarantee

Facility

– Result Based

Incentive

– Mini-Grid Regulations

in UP

– Action Plan for Mini-

Grid Projects in UP

Rooftop Solar (RTS)

– Net metering based RTS

scheme in 3 states

– Policy Coalition

– RTS policy in West Bengal

– City-wide 5 MW RTS

Program in Rajasthan

– Sustainable energy

development plan in

Maldives

Solar Park

– Badhla Solar Park,

Rajasthan

– Rewa Solar Park,

Operating manual

– Solar Park

Development &

Transmission Sector

Project

Substantial electrification at village level; high % un-electrified Households

3

237 million people in India without having

access to electricity (IEA, World Energy

Outlook 2015)

Discom’s Disinterest: Perceived financial burden,

price disparity (ACoS vs Tariff – cent 9.93 Vs 7.93)

8.2

12.4

11.4

4.3

3.0

2.5

2.7

1.6

Uttar Pradesh

Rajasthan

Andhra Pradesh

Madhya Pradesh

Punjab

Haryana

Maharashtra

Jharkhand

Financial Burden (In USD Billion)

Mini-Grid- Potential Solution

Issues: Sustainability, Financing, Grid Arrival Government’s initiatives 24X7 electricity

access to all

Model Scheme Implementation Process Flow

IMPLEMENTATION PROCESS Rationale Rationale

• Benefits of Centralized empanelment • Performance monitoring – credit

ranking • Easy Incentive & penalty

mechanisms

• One standard • Ensures quality & reliability

• Economies of scale • Area segmentation- on topography • Eliminate topography based

competition

• Capacity determination • Demand based QoS & inclusiveness

• Cost based competition • Faster electrification • Economies of scale • Bidding based on capital cost/kW

• To be provided as per debt schedule based on performance

• Inclusiveness • Performance based ranking • Incentive or penalty

• Facilitate better leverage of equity

• Help scaling up

• Help to get debt from banks

Empanelment of bidders

at MNRE

Release of interest subsidy

Technical specs, benchmark capital cost,

QoS, Performance matrix

Performance monitoring

Clustering of areas by SNA

Implementation of the project

Demand estimation by SNA Debt by banks

Centralized BPM by MNRE

Counterparty Guarantee by

SPV

A

B

C

D

E

J

I

H

G

F

4

Performance Metrics designed to provide incentive for good performance for current project and incentive for scale up

5

*(I<0.8 for 1st year of operation and I<0.7 for subsequent years of operation; I = [N+1/N-1]- (2/(N(N-1)µ) x (∑ Pi Ui (i=1,n)) (where N is the number of households in the village as per census 2011, µ is the mean electricity consumption, Pi is the rank of the consumer with consumption Ui

Projects assessment parameters

Generation/minimum expected generation

Households electrified/min. households to be electrified based on capacity

Inclusiveness (I)* etc.

Interest subsidy disbursement contingent on meeting Performance Metrics

Maximum project capacity to be bid by Project Developer is dependent upon rating

Provision under Bid Process-2, non-performance of local entrepreneurs associated with empanelled bidders, may affect rating of empanelled bidder

to ensure empanelled bidders provide good quality & undertake basic due-diligence of projects themselves

Schematic diagram of the model

The decrease in NPAs shall be due to

higher capacity allocation to the entities

that have performed as per the

performance metrics

Illustration

Local

Entrepreneur

SPV

Consumers

• Minimum Technical Mini-Grid Specifications

• BPM • Credit rating

Tariff

Electricity Services

Empaneled

Bidder

Bank

• Counter party guarantee by SPV created by GOI

• Interest Subsidy

Additional Funding/Credit Guarantee to the Technology Provider either directly or under Build Maintain model contingent on • Meeting SLA • Debt Repayment

Independent

Auditor

Assessment as per SLA

SNA

• List un-electrified areas • Segregation of regions • Clustering • Demand Estimation • Performance

Monitoring

Empanelled Project

Developer

OR

MNRE

Debt service

BID-1

BID-2

9 88

438

13 108

490

44%

37% 34%

20%

10%

5%

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

600

Ph-I (FY15-17) Ph II (FY 17-19)

Ph III (FY 19-20)

Pvt Investment (USD Million)

Govt Subsidy (USD Million)

Govt support (%)

NPA (%)

6

Relevance of a Credit Guarantee Schemes (CGS)

7

Credit

Guarantee

Scheme

Tool for risk mitigation & credit

enhancement measures

Operated at different levels to substitute

part of the collateral required from a

borrower

If borrower fails to repay, lender can resort to

partial repayment from guarantor

Promote access to more credit / better credit for the entrepreneurs

& diversifies the risk for the lending institutions

• Difference exist between Viable Projects & Bankable Projects

• Projects can be viable in long-run, but not definitely bankable on account of

Lack of collaterals

CGS provides

complementary

collaterals/guarantees

Information

asymmetry

CGS overcome

Information asymmetry

High Risk

CGS transfers or

diversifies risk

Operational Parameters

8

Objective

Formulation

Managing

Partners

Credit

Guarantee

Fund

Models

Organization

Setup

Eligibility

Fees &

Charges

Risk

Sharing

Performance

Monitoring

Creation

of fund

Accounting

&

Reporting

Operating

Procedures &

Processes

• Need

• Target

• Scope

• Funded Vs

Non-funded

• Retail Vs

Portfolio

• Direct or

Indirect

• Beneficiary

• Eligibility

Criteria

• Delivery

Mechanism

• Size of the

guarantee

• Coverage

of interest

• Type of Fund

• Size of Fund

• Sources of

Fund

• Leverage

• Application

• Appraisal

• Issuance

• Loan follow-up

• Claims

• Claims Validation

• Claims Payment

• Recovery of Losses

• Core Partners

• Participating FI

• Capacity Building

• Performance

Monitoring

• Marketing of Fund

• Institutional

Arrangement

• Structure

• Governance

• Capacity Building

• Staffing

• Relates Expenses

• Methods

• Fees

• Incentives • Financial

Statements

• Provisioning for

Guarantee

• MIS

• Performance

Monitoring

• Performance Rewards

• Medium term

additionality created

Eligibility and Risk Coverage

Eligibility Conditions

• Min. 20 kW & Max 1 MW for systems other than stand-alone systems

• Self-use & third party (including leasing arrangement)

• All technologies

• Grid connected systems eligible after 31st March 2019

Risk Coverage

• Coverage Ratio- Till 2019, 75% to lending institution. Post 2019, technology & project specific ratio

• Default amount- Outstanding principal & interest

• Total amount- As on date of account becoming NPA or on which lending institution has lodged the

claim, whichever earlier

• Provision of partial third party guarantee or personal guarantee

Risk Allocation

• Any loss be borne by CGS

& lending institution in

ratio of 75:25 till the

bank exhausts their risk

coverage of 25

9

USD 0.108

Million

USD 0.75

Million Nil

First USD 0.008

Million to FIs

25% of balance to FIs

USD 0.025 Million

USD 0.10

Million

75% to CGS

USD 0.075 Million

Illustration- Default USD 0.108 Million

Other Aspects

10

Reporting & Follow up

FIs CGS

Guaranteed loans

portfolio

(monthly)

Follow up on cases

with arrears

Loan follow-up (within

2 weeks of 1st missed

repayment)

Findings Review

In agreement with bank can

approve rescheduling of the loan

on case-by-case basis

Default Claims

FI responsible to-

• Intimate fund, once amount due for

90 days

• Initiate legal proceedings

• File claim when amount becomes NPA

as per RBI guidelines

• Pay claim processing fees of USD

76.92 along with their claim for

guarantee

Loss Recovery

Bank responsible for-

• Liquidating collateral & pursue for recovery

• Proceeds from sale of collateral & any additional amount

recovered from defaulter, shared in the ratio of

coverage ratio (after adjusting expenses of FIs)

Credit Rating linked Fee

Unrated or others- 100 % of Guarantee Fees

Upper

Band

90 %

of

Sta

ndard

Fees

Mid

dle

Band

95 %

of

Guara

nte

e

Fees

Low

er

Band

100 %

of

Guara

nte

e F

ees

Performance Evaluation

FIs & Beneficiaries Evaluation

Evaluation based on loan portfolio size & default rates

Interest subsidy (~1%- 2%) after 2 yrs of operation, if meets pre-set CUF target

Defaulters excluded for 3-5 years & penalized @ 2-3% interest rate for next project

Centralised Credit information bureau may help in reducing default rates

Scheme Performance Evaluation (after 5 yrs of operation)

Additional loans disbursed solely as a result of the guarantee scheme

Additional employment generated on account of these loans

Additional direct revenue/indirect revenue generated by the beneficiary projects

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Credit Guarantee scheme will lead to significant economic additionality

SN Description USD

Million

1 Size of the fund 14.77

2 Total Guarantee Commitments 147.69

3 Total Loan Disbursed (25% risk with

the banks) 196.92

4 Equity Contribution (20%) 49.23

5 Total Size of the Projects 246.15

6 Default Rate 5%

7 Total Defaults 9.85

8 Coverage by Guarantee Fund 75%

9 Total Pay-out by Guarantee Fund 7.38

10 Interest Subsidy 1.5 %

11 Total pay-out towards interest

subsidy 5.08

12 Net fund after 8 years 15.38

Fund will be able to sustain for a period of 8 years

under the current assumption set.

Impact on Beneficiaries

• Total Project Size- USD

246.15 Million

• Net Returns- USD

180.77 Million

Impact on FIs

• Net Inflow-USD 100.46

Million

(Banks will have cost of

funds to offset against it)

12

Lets Begin!

13

Thank you

Rakesh Jha

Director, Meghraj Capital Advisors Pvt Ltd

Email – rakesh@meghrajindia.com

Skype- rjha1111

Phone - +91 956 000 14 51

Our Offices and Core Markets

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14

Click

Scheme is expected to cater to 40% or 200 MW of the potential market

16

100 250

150

1st year 2nd year 3rd year

un-electrified villages capacity (MW)

Potential market for CGS

Source mix for capacity addition

Solar PV

60%

Biomass 30%

SHP 10%

USD 14.8 Million Corpus in 3 tranches

As per current benchmark capital cost (MNRE)

SN Particulars Unit Value

1 Reqd. Capacity Addition MW 500

2 Market to be covered MW 200

3 Per MW rate of Solar PV USD

Million/MW

1.38

4 Per MW Rate of Bio-mass 0.92

5 Per MW Rate of SHP 1.23

6 Contribution of Solar PV % 60%

7 Contribution of Bio-mass % 30%

8 Contribution of SHP % 10%

9

Wtd Average Cost per

MW for the suggested

mix

USD

Million/MW 1.23

10 Total Cost towards new

capacity addition USD Million 246

11 Debt Financing (@80%) USD Million 197

12 Coverage Ratio of

Guarantee % 75%

13 Assumed Leverage No. 10

14 Size of the fund USD Million 15

3.0

7.4

4.4

1st Year 2nd Year 3rd Year