Credit Enhancement Guarantee Scheme by IREDA

Indian Renewable Energy Development Agency (IREDA) has proposed the implementation of the Credit Enhancement Guarantee Program. The scheme is focused on raising bonds towards renewable energy projects. The primary motive of the scheme is to enhance bond issuance by the developers for projects based on renewable resources such as solar and wind energy. It is mandatory that these projects have been in operation for a minimum span of one year.

Credit Enhancement Guarantee Scheme

In accordance with the documentation issued by the Government based on Credit Enhancement Guarantee Scheme, IREDA is expected to extend credit enhancement through unconditional and irrevocable partial credit guarantee. This is executed in order to enhance the credit rating of the corresponding proposed bonds. This enhanced guarantee program is also beneficial for developers of solar and wind energy based projects which are connected by means of grids.

Objectives of the Scheme

The following are the objectives of the Credit Enhancement Scheme.

Under the Credit Enhancement Guarantee Scheme, IREDA can provide a guarantee of upto 25% for the suggested size of the bonds as recorded in the recent audited balance sheet.
In any case, the guarantee provided on the proposed issue size of the bonds should not exceed 20 percent of the complete project cost.
Through the Credit Enhancement Guarantee Scheme, IREDA is looking forward to regulating the renewable energy bond markets in India. As this may lead to scaled-up availability of funds at menial borrowing rates.
IREDA has also enforced firm and inflexible guidelines in order to filter defaulters and developers of non- performing unproductive projects.
The IREDA officials also stated that the scope for such bonds in the renewable energy sector is gradually rising.
It is also expected that the implementation of Credit Enhancement Guarantee Scheme will positively result in accelerated profit rates in the agency.

Features of Credit Enhancement Guarantee Scheme

The IREDA has demanded that projects applying for these bond proceeds, should not suffer more than three to one (3:1) Debt to Equity (D/E) ratio.
The maximum tenure of these bonds is anticipated to sustain only upto 15 years.
The Credit Enhancement Guarantee Scheme is a non-fund programme which guarantees partial credit.
The scheme also attracts investment of cost-efficient and long tenure funds through credit enhancement based on project bonds issued by the sponsors.
It is believed that the scheme will assist the project developers to raise funds at a inexpensive steady rate and in turn, help in the bond market development in India.

Eligibility Criteria

The Renewable Energy Project is expected to have an Operational History of at least one-year post COD, as on the date of the request for Credit Progression.
The minimum issue size of the proposed bonds is expected to be lesser than INR 1 Billion (USD 14.4 million) to be eligible for the program.
The Project Developers should not have any criminal proceedings pending against them. Also, they should not be one amongst the Defaulters List of any Government Bureaus such as Reserve Bank of India (RBI) or Credit Information Bureau Limited (CIBIL).
Similarly, as on the date of application, the firm or its subsidiaries applying to avail the benefits of Credit Enhancement Guarantee Scheme should not fall under the default list of any Financial Institution/ Bank/ IREDA.
The amount earned through Credit Enhancement of bonds shall be used only for repaying the current debt either in instalments or entirely.
Apart from the above-stated rules, the applicant should also satisfy all the eligibility conditions imposed by the financing norms of IREDA.
The Solar and Wind energy projects seeking benefits from the Scheme should also possess a Debt Service Coverage Ratio (DSCR) of 1.2 and a credit rating of not less than ‘BBB’ which states that Security currently.

Security Regulations

Investors of the Project Bond and the senior lenders in the project will have Equivalent Charge on the assets of the project bond distributor. IREDA will impose a charge which may be reduced for them.
IREDA will ensure this Equivalent Charge after paying its obligations under the Guarantee only to the extent of invoked guarantee on either the acceleration of Project Bonds and/or termination of the subsidy agreement and/or enforcement of security.
The Agency has also decided to explore securing Corporate guarantee/Personal guarantee from the sponsors/promoters or any other form of protection to ensure its exposure.
TRA Agreement with trustee bank - The terms of Bonds being issued, for which IREDA is issuing the Guarantee should have Equivalent Charge on the project’s TRA at par with Senior Lenders.

Fee Imposed on Credit Enhancement Guarantee Scheme

The Guarantee Fee charged by IREDA lies between the range of 1.80% - 2.90% per annum of its exposure. While, the Credit Enhancement Fee charged by IREDA will be calculated based on the eternal rating of the project, market conditions, risk analysis, etc.
Apart from the above-mentioned Fee structures, the applicant shall be accountable to pay a Processing Fee which amounts to 0.10% of the exposure of Guarantee. The same amount has to be paid to IREDA during the Documentation Process for the issue of guarantee.
On account of the stated Guarantee Fee, the borrower shall reimburse the other due expenses, including the costs spent on Independent consultant, CA, IREDA’s Financial Advisor, Meetings, Travel, Lodging, Service Tax, etc.
Payment of Fee - The other Fee is paid annually in advance as per the applicable procedure No front end fee shall be charged

Further Reforms

The additional information about Credit Enhancement Guarantee Scheme includes the following details enlisted,

Banks and Financial institutions have allotted nearly INR 788 Billion (USD 11.4 Billion) towards funding clean energy projects, out of which INR 335 Billion (USD 4.84 Billion) has already been released as of March 2016.
Twenty- three public sector banks and seven private sector banks, along with Non-Banking Financing Companies (NBFCs) which is inclusive of four public sectors and two private sector units have assured to finance 76.3GW of renewable energy projects.
These total cost involved for the implementation of these projects through a span of five years amounts to INR 3820 Billion (~USD 55.2 Billion)

Other Regulations

IREDA has laid certain rules to be followed by the applicants of the Credit Enhancement Guarantee Scheme.

No Fraud or Forgery is to be committed by the Borrower or promoters of the project.
No Criminal Proceeding to be instituted against the Borrower or developer of the project.

Trespassing these rules may lead to adverse results such as terminating the guarantee in cases where the guarantee is yet to be made effective. However, if the guarantee is made effective, it would not terminate as it is unconditional and irrevocable.

Back to Learn

Frequently Asked Questions

Common questions about Credit Enhancement Guarantee Scheme for Renewable Energy.

The Credit Enhancement Guarantee Scheme is a program proposed by the Indian Renewable Energy Development Agency (IREDA) to provide partial credit guarantees to enhance the credit rating of bonds issued by developers of renewable energy projects like solar and wind. This aims to facilitate easier access to funds at lower borrowing rates for these projects.

The primary objectives of the scheme are to regulate the renewable energy bond market in India, increase the availability of funds at affordable rates for project developers, and help accelerate the growth of the renewable energy sector. IREDA also aims to filter out defaulters and non-performing projects through strict eligibility criteria.

Under the Credit Enhancement Guarantee Scheme, IREDA can provide a guarantee of up to 25% of the proposed bond issue size, as per the recent audited balance sheet. However, the guarantee cannot exceed 20% of the total project cost.

To be eligible for the Credit Enhancement Guarantee Scheme, a renewable energy project must have an operational history of at least one year post the Commercial Operation Date (COD), as on the date of the request for credit enhancement.

The renewable energy projects seeking benefits from the Credit Enhancement Guarantee Scheme should possess a credit rating of not less than 'BBB', indicating a secure investment-grade rating.

Under the scheme, investors of the project bonds and senior lenders will have an equivalent charge on the assets of the project bond issuer. IREDA will impose a charge that may be subordinated, ensuring its exposure is secured through corporate or personal guarantees from sponsors or other forms of protection.

IREDA charges a guarantee fee ranging from 1.80% to 2.90% per annum of its exposure, based on factors like the project's credit rating, market conditions, and risk analysis. Additionally, a processing fee of 0.10% of the guarantee exposure is payable during documentation.

No, the amount raised through credit enhancement of bonds can only be used for repaying the current debt of the project, either in instalments or entirely. It cannot be utilized for other purposes.

The project developers should not have any criminal proceedings pending against them or be listed as defaulters by government agencies like the Reserve Bank of India (RBI) or Credit Information Bureau Limited (CIBIL). Their firm or subsidiaries should also not be defaulters with any financial institution, bank, or IREDA.

IREDA has mandated that projects applying for bond proceeds under the Credit Enhancement Guarantee Scheme should not have a Debt to Equity (D/E) ratio exceeding 3:1.