Product Quantum (Rs. Cr) Long Term Rating Short Term Rating
BOND 630.00 ACUITE A- | CE | Stable | Assigned -
Total Outstanding Quantum (Rs. Cr) 630.00 - -

Erratum: In the last PR dated 17 Jan 2023 the material covenants were not mentioned and the same is added in this PR.
Rating Rationale
­Acuite has assigned the long term rating of ACUITE A- (CE) (read as ACUITE A minus (Credit Enhancement)) on the existing bonds of Rs.389.30 Cr and the proposed bonds of Rs.240.70 Cr of Meghalaya Energy Corporation Limited. The outlook is 'Stable'.

Rationale for the rating
The rating takes into cognizance an unconditional and irrevocable guarantee by the Government of Meghalaya (GoMe) backed up by a structured payment mechanism, thereby ensuring timely debt servicing for both the existing and proposed bonds issue (rated instrument). Acuité also derives comfort from the stable fiscal position of the Government of Meghalaya, which is expected to provide timely funding support to MeECL, as and when necessary. Further, the rating takes into account a gradual improvement in the business position of the entity coupled with a cost plus based tariff mechanism. These strengths are partly offset by the below average financial risk profile of the company and the inherently regulated nature of operations in the electricity business. Acuite has also noted the weak liquidity position of MeECL on a consolidated basis which is reflected in the ongoing challenges faced by its subsidiaries to service outsanding non-guaranteed debt from financial institutions. 

About the Company
­The Meghalaya Energy Corporation Ltd. (MeECL) is a Government Company, wholly owned by the Government of Meghalaya, incorporated in the year 2009 and inherited its business from the erstwhile Meghalaya State Electricity Board (MeSEB) in the year 2010. It has wholly owned three subsidiary Companies namely, Meghalaya Power Generation Corporation Ltd. (MePGCL), Meghalaya Power Transmission Corporation Ltd. (MePTCL) and Meghalaya Power Distribution Corporation Ltd. (MePDCL) responsible for Generation, Transmission and Distribution of Electricity respectively throughout the State as State Utilities.
 
Standalone (Unsupported) Rating
­ACUITE C
 
Analytical Approach
To arrive at the rating, Acuité has considered the consolidated business and financial risk profile of MeECL with its wholly owned subsidiaries namely, Meghalaya Power Generation Corporation Ltd. (MePGCL), Meghalaya Power Transmission Corporation Ltd. (MePTCL) and Meghalaya Power Distribution Corporation Ltd. (MePDCL) and notched up the rating by factoring in the Credit Enhancement available in the form of guarantee extended by the Government of Meghalaya which is embedded within a well defined Structured Payment Mechanism.
Extent of Consolidation - Full
 

Key Rating Drivers

Strengths
Support from the government of Meghalaya
MeECL is a wholly-owned undertaking of the GoMe and a strategically important entity of the power sector infrastructure for the state of Meghalaya. The ownership structure provides adequate financial flexibility. It is also the nodal agency of the government for undertaking power generation, transmission and distribution activity in the state. Being the power generation, transmission and distribution licensee by MSERC, MeECL is mandated to ensure the generation of power from its installed capacity and for undertaking Rural Electrification (RE) task in the state with the objective of providing access of electricity to all rural households in line with the National Rural Electrification Policy. MeECL's credit profile is also supported by its access to funds at low cost and its ability to mobilise financial resources from several financial institutions and multilateral development institutions. The rating factors in the financial flexibility of MeECL.

Acuité believes that MeECL, being a 100 per cent undertaking of GoMe, shall continue to benefit from the financial, operational and management support as and when required. The GoMe has demonstrated financial support by way of loans and grants to MeECL on a regular basis. Any changes in the ownership pattern of MeECL or any event that impinges GoMe's overall credit profile shall remain a key rating sensitivity.
 
Unconditional and irrevocable guarantee backed by a structured payment mechanism
The existing listed bonds and proposed bonds of Rs. 630.00 Cr has an unconditional and irrevocable guarantee from the GoMe. The guarantee also has a ‘T-7’ structure payment mechanism to ensure the timely debt servicing of the debt issue and redemption. MeECL has to maintain a DSRA of two quarters throughout the tenure of the issue and a bond redemption reserve account. As on 31 March 2022 (Provisional), the DSRA balance amounted to Rs. 11.41 Cr, and the balance in the bond redemption reserve account was Rs. 77.73 Cr for the issued bonds of Rs. 389.30 Cr.

The structured payment mechanism, as enshrined in the trust deed, to ensure that the following timelines are followed with 'T' as the due date for payment:
The company shall, remit the Bond Payment Amounts to the Bond Servicing Account, such that the Bond Servicing Account is fully funded to the extent of the amounts due on the subsequent Due Date falling at the end of such Payment Period (“Due Amount”) no later than 15 (fifteen) days prior to such relevant Due Date (as defined in the Debenture Trust Deed) ) (T-15 days) (“Funding Date”).
 
The Account Bank shall independently monitor the adequacy of credit in the Bond Servicing Account. In the event the company has not funded the Bond Servicing Account to the extent of the Due Amount, above on or prior to any Funding Date, the Account Bank shall intimate the same to the  Debenture Trustee on the day falling 14 days prior to the relevant Due Date (T-14 days) and the Debenture Trustee shall on receipt of such intimation issue a notice to the company and GoMe in writing in the form set out in Schedule II (“Shortfall Intimation Notice”) on the day falling 12 days prior to the relevant Due Date (T-12 days) (“Shortfall Demand Date”) to fund the Bond Servicing Account such that it is funded for no less than the Due Amount no later than 10 days prior to each Due Date (T-10 days) (“Shortfall Payment Date”). The GoMe irrevocably and unconditionally undertakes to fund the Bond Servicing Account.
 
Upon failure of the Government of Meghalaya(GoMe) and the company to ensure that the Due Amount is collected and/or funded in the Bond Servicing Account on or prior to each Shortfall Payment Date, the Debenture Trustee shall call upon the Guarantee given by the GoMe in terms of this Deed by issuing the Demand Notice on the day falling immediately after the relevant Shortfall Payment Date (T-9 days) requiring the GoMe to make good the shortfall in the Bond Servicing Account by such amounts such that the Bond Servicing Account is funded for no less than the Due Amount no later than 7 (seven) days prior to each Due Date (T-7 day) (“Final Funding Date”).

‘Cost plus’ tariff mechanism
The billing of MeECL are regulated and required the Annual Revenue Requirement (ARR) under ‘cost-plus’ based tariff mechanism. The regulator, Meghalaya State Electricity Regulatory Commission (MSERC) allows a post-tax return on equity of 15 per cent and other uncontrollable expenses are allowed to be passed through in tariff through Annual Performance Review (APR) process. Acuité derives comfort from the cost plus based tariff mechanism.
Weaknesses
Challenges in servicing non-guaranteed debt in subsidiaries 
Acuite has noted that there have been delays by MeECL's subsidiaries in servicing debt obligations to Power Finance Corporation (PFC) and Rural Electrification Corporation Limited (REC), which are not guaranteed by the GoMe. Acuité has hence constrained the unsupported rating of the entity and believes that timely servicing of their debt obligations would be a key monitorable.The liquidity position of consolidated MeECL will continue to remain a point of concern.

However, Acuité derives comfort from the continuous support provided by the Government of Meghalaya (GoMe) and unconditional and irrevocable guarantee given by GoMe along with a structured payment mechanism for the bonds of Rs.630 Cr.

Weak financial risk profile
The company’s weak financial risk profile is marked by reducing networth. The tangible net worth of the company has been eroded due to continuous accumulated losses. The networth stood at negative Rs.1636.34 Cr as on March 31, 2022 (Provisional). Any significant improvement in the financial position of MeECL is unlikely in the near to medium term.

­Regulated nature of operations
MeECL continues to be exposed to regulatory uncertainty, given that the revenues are influenced by the regulatory framework governing the power sector. The company operates through a cost-plus return on equity model laid down by MSERC. Any change/ reduction in return on equity or a tightening of the MSERC norms could result in lower operating cash flows. Acuité believes that the delay in finalisation of the tariff could result in cash flow mismatch in the medium term.

Assessment of Adequacy of Credit Enhancement
The structure provides for adequate covenants to safeguard the interest of the investors and has adequate buffers and triggers available to initiate timely corrective action and effectively mitigate the risk arising out of any funding gap in MeECL.
ESG Factors Relevant for Rating
­Not Applicable
 
Rating Sensitivities
  • ­Timely support from the Government of Meghalaya
  • Periodical tariff revision
  • Improvement in financial risk profile
  • Any deterioration in liquidity position
 
Material covenants
­The Company declares, represents and covenants as follows:-
  1. The activity for which the Bonds are being issued are within the purview of the object clause of the Company's Memorandum and Articles of Association and that the relevant approvals, consents, permissions as are necessary for or in connection with the issue of Bonds and the execution, performance, validity and enforceability of this agreement have been obtained.
  2. That the Company shall execute all such deeds, documents and assurances and do all such acts and things as the Trustees may reasonably require for exercising the rights under these presents and the Bonds or for effectuating and completing the security if any hereby created and shall, from time to time and at all times after the Guarantee or the security hereby constituted shall become enforceable, execute and do all such deeds, documents, assurances, acts and things as the Trustees may require for facilitating realisation and for exercising all the powers, authorities and discretions hereby conferred on the Trustees and shall give all notices, orders and directions which the Trustees may think expedient and shall perform or cause to be performed all acts and things requisite or desirable for the purpose of giving effect to the exercise of any of the said powers, authorities and discretions and further shall, for such purposes or any of them make or consent to such application to any Government or local authority as the Trustee may require for the consent, sanction or authorization of such authority and it shall be lawful for the Trustees to make or consent to make any such application in the name of the Company and for the purposes aforesaid a certificate in writing signed by the Trustees to the effect that any particular assurance or thing required by them is reasonably required by them shall be conclusive evidence of the fact.
B. GENERAL COVENANTS
    Affirmative Covenants:-
The Company hereby covenants with the Trustees that the Company will at all times during the continuance of the Guarantee (except as may otherwise be previously agreed in writing by the Trustees):-
  1. The Company hereby appoints the Trustees as its constituted attorney to do all such acts, deeds, matters and things as may be necessary, reasonable and required upon the issuance of the notice by it in relation to, all further modalities for obtaining of the amounts from Guarantor, or as may otherwise be required by the provisions of the Guarantee Agreement, including if necessary, any arrangements or documents to be entered into and for executed in favour of the Trustees.
  2. Carry out and conduct its business with due diligence and efficiency and in accordance with sound engineering, technical, managerial and financial standards and business practices with qualified and experienced management and personnel
  3. Utilise the monies received towards subscription of the bonds for the purpose as stated in this agreement and at the end of each financial year shall furnish to the Trustees a statement showing the manner in which the aforesaid monies have been utilized from the Statutory auditor of the Company
  4. Keep proper books of account as required by the Act and therein make true and proper entries of all dealings and transactions of business of the Company and keep the said books of account and all other books, registers and other documents relating to the affairs of the Company at its Registered Office or, where permitted by law, at other place or places where the books of account and documents of a similar nature may be kept and the Company will ensure that all entries in the same relating to the business of the Company shall at all reasonable times be open for inspection of the Trustees and such person or persons as the Trustees shall, from time to time, in writing for that purpose, appoint.
  5. Give to the Trustees or to such person or persons as aforesaid such information as they or he or any of them shall require as to all matters relating to the business, property and affairs of the Company and furnish to the Trustees copy of every report, balance sheet, profit and loss account, circulars or notices, and the Trustees shall be entitled, if they think fit, from time to time, to nominate a firm of chartered accountants to examine the books of account, documents and property of the Company or any part thereof and to investigate the affairs thereof and the Company shall allow any such accountant or agent to make such examination and investigation and shall furnish him with all such information as he may require and shall pay all costs, charges and expenses of and incidental to such examination and investigation;
  6. Permit the Trustees and such person, as they shall, from time to time in writing for that purpose appoint, to enter into or upon and to view the state and condition of all the assets pertaining to the Project and pay all travelling, hotel and other expenses of any person whom the Trustees may depute for the purpose of such inspection and if the Trustees shall, for any reason, decide that it is necessary to employ an expert, to pay the fees and all travelling, hotel and other expenses of such expert;
  7. Punctually pay all rents, royalties, taxes, rates, levies, cesses, assessments, impositions and outgoings, governmental, municipal or otherwise imposed upon or payable by the Company as and when the same shall become payable and when required by the Trustees produce the receipts of such payment and also punctually pay and discharge all debts and obligations and liabilities which may have priority over the Guarantee or any security created and observe, perform and comply  with all covenants and obligations which ought to be observed and performed by the Company in respect of the business of the Company;
  8. Forthwith give notice in writing to the Trustees of commencement of any proceedings affecting the interest of the Bond Holders and or Trustee.
  9. Diligently preserve its corporate existence and status and all rights, contracts, privileges, franchises and concessions now held or hereafter acquired by it in the conduct of its business and that it will comply with each and every term of the said franchises and concessions and all acts, rules, regulations, orders and directions of any legislative, executive, administrative or judicial body applicable. PROVIDED THAT the Company may contest in good faith the validity of any such acts, rules, regulations, orders and directions and pending the determination of such contest may postpone compliance therewith if the rights enforceable under the Bonds or the security for the Bonds is not thereby materially endangered or impaired. The Company will not do or voluntarily suffer or permit to be done any act or thing whereby its right to transact its business might or could be terminated or whereby payment of the principal of or interest on the Bonds might or would be hindered or delayed.
  10. Pay all such stamp duty (including any additional stamp duty), other duties, taxes, charges and penalties, if and when the Company may be required to pay according to the laws for the time being and in the event of the Company failing to pay such stamp duty, other duties, taxes and penalties as aforesaid, the Trustees will be at liberty (but shall not be bound) to pay the same and the Company shall reimburse the same to the Trustees on demand.
  11. The Company shall pay to the Debenture Trustee so long as it holds the office of the Debenture Trustee, remuneration and all reasonable costs, charges and expenses as set out in the Debenture Trustee Consent Letter, for its services as the Debenture Trustee (hereinafter referred to as the "Debenture Trustee Fees"). Arrears of instalments of annual service charges, if any, shall carry interest at the rate specified in Consent Letter till theactual payment.
  12. Reimburse all sums paid or expenses incurred by the Trustees or any Receiver, Attorney, Manager, Agent or other person appointed by the Trustees for all or any of the purposes mentioned in these presents immediately on receipt of a notice of demand from them. the Company will, on demand, pay and satisfy or obtain the releases of such persons from such liabilities and if any sum payable under these presents shall be paid by the Trustees, the Company shall, forthwith on demand, reimburse the same to the Trustees and until payment or reimbursement of all such sums, the same shall be a charge upon the assets of the Company.
  13. Promptly inform the Trustees if it has notice of any application for winding up having been made or any statutory notice of winding up under the Act or otherwise of any suit or other legal process intended to be filed or initiated against the Company and affecting the title to the Company's properties or if a receiver is appointed of any of its properties or business or undertaking
  14. Promptly inform the Trustees of the happening of any labour strikes, lockouts, shut­ downs, fires or any event likely to have a substantial effect on the Company's profits or business and of any material changes in the rate of production or sales of the Company with an explanation of the reasons thereof
  15. Promptly inform the Trustees of any loss or damage which the Company may suffer due to any force majeure circumstances or act of God, such as earthquake, flood, tempest or typhoon, etc. against which the Company may not have insured its properties
  16. Submit to the Trustees its duly audited annual accounts after the finalization of the same within 6 (six) months from the end of the financial year
  17. Submit to the Trustees, on quarterly basis, the information sought by the Trustees in the format as may be specified which shall include but not be limited to following:
    1.  list of the names, addresses along with other available details of the Bondholders;
    2. details of the interest due, but unpaid and reasons thereof;
    3. the number and nature of grievances received from the Bondholders and resolved by the Company and unresolved by the Company and the reasons for the same
    4. statement that the Security is sufficient to discharge the claims of the Bondholders as and when they become due
  18. Submit to the Trustees, at the end of each calendar quarter (or any other dates as may be requested by the Debenture Trustee), a certificate from the statutory auditors of the Company with respect to the use of the proceeds raised through the issue of Debentures
  19. A certificate duly certified by the Company's Auditors certifying that the Company has transferred a suitable sum to the debenture redemption reserve, as required under applicable law
  20. Notify the Trustee of any major change in the composition of its board of directors, which may amount to change in control as defined in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  21. The Issuer shall furnish to the Trustee details of all grievances received from the Subscriber(s) and the steps taken by the Issuer to redress the same. At the request of the Subscriber(s), the Trustee shall, by notice to the Issuer, call upon the Issuer to take appropriate steps to redress such grievance and shall, if necessary, at the request of any Subscriber(s) representing not less than one-tenth in value of the nominal amount of the Debentures for the time being outstanding, call a meeting of the Subscriber(s)
  22. The Company is aware that in terms of Regulation 14 of the SEBI (Debenture Trustees) Regulations, 1993 as amended from time to time, the Trust Deed has to contain the matters specified in Section 71 of the Companies Act, 2013 and Form No. SH.12 specified under the Companies (Share Capital and Debentures) Rules, 2014. The Company hereby agrees to comply with all the clauses of Form No. SH.12 as specified under the Companies (Share Capital and Debentures) Rules, 2014 as if they are actually and physically incorporated herein in this deed.
  23. The Company shall while submitting half yearly/annual financial results to the BSE/NSE, disclose the following line items along with the financial results accompanied by a certificate from the Debenture Trustee confirming that it has taken note of the said content and the same shall be communicated to the Debenture Holder(s) on a half yearly basis:
    1. Credit rating and change in credit rating, if any;
    2. Debt to equity ratio accompanied with a certificate of a practicing chartered accountant confirming the said debt-equity ratio;
    3. Previous due date for payment of interest/principal amount and whether same has to be paid or not
    4. Next due date for payment of interest/principal amount
Nominee Director
The Trustees shall have a right to appoint a Nominee on the Board of Directors of the Company (hereinafter referred to as "the Nominee Director"). The Company hereby agrees to amend the Articles of Association of the Company with the permission of the Government of Meghalaya to permit the Trustees to have a right to appoint a nominee on the Board of Directors in the event of:-
 
    1. Two consecutive defaults in payment of interest to the Bondholders; or
    2. Default on redemption of the Bonds; or
    3. Default in creation of security for bonds if any.

Such Nominee Director shall not be liable to retire by rotation nor required to hold any qualification shares.

Additional Covenants

Default in Payment and Other Defaults

In case of default in payment of interest and/or principal redemption on the due dates or observance of any other terms, conditions or covenants as per this Deed, Disclosure Document(s) in respect of a relevant tranche/ series of the Debentures, additional interest/ default interest of atleast @ 2% p.a. or such other rate as may be prescribed under the Applicable Law over and above the applicable implicit yield/ Coupon Rate/ Interest Rate will be payable by the Issuer for the defaulting period in respect of such tranche /series of the debentures.

Delay in listing

In case of delay in listing of the debt securities, wherever applicable, beyond T+4 trading days as specified by the Securities and Exchange Board of India (SEBI) vide its circular dated 5th October, 2020 in respect of the relevant tranche of the Debentures, the Issuer will pay default/ additional interest of atleast 1 % p.a. over the coupon rate or such other rate as may be prescribed under the Applicable Law from the expiry of 30 (thirty) days from the Deemed Date of Allotment till the listing of such debt securities to the investor.
 
Liquidity Position: Stretched
The company’s liquidity is stretched on account of accumulated losses driven by weak operating efficiencies and lack of adequate tariff revision. There are delays in servicing of non-guaranteed debt, borrowed from PFC and REC in the subsidiaries. The current ratio stood below unity at 0.30 times as on March 31, 2022 (Provisional), on account of high other current liabilities due to deferred revenue, security deposits, retention money, liabilities for capital supplies and interest accrued.

However, the state government of Meghalaya has given unconditional and irrevocable guarantee for the bonds of Rs.630 Cr and in addition to this, GoMe has given guarantee to some loans borrowed from PFC and REC; which provides financial flexibility to the company. Further, MeECL has unencumbered bank deposits of Rs.159.96 Cr, investment for bond redemption reserve of Rs. 77.73 Cr and cash and bank balances of Rs.86.04 Cr as on March 31, 2022 (Provisional).

Acuité believes that going forward the liquidity position of the company will improve backed by the gradually improving business risk profile with continuously enhancing generation capacity and declining AT&C losses.
 
Outlook: Stable
­Acuité believes that the company will maintain 'Stable' outlook over the medium term due to an improvement in its operational parameters including AT&C losses. The outlook may be revised to 'Positive' in case of an improvement in its liquidity profile and an adequate revision in tariffs which will translate into higher revenues and sustenance in the profitability margins. Conversely, the outlook may be revised to 'Negative' in case of any significant deterioration in its leverage and liquidity position.
 
Other Factors affecting Rating
­None
 

Particulars Unit FY 22 (Provisional) FY 21 (Actual)
Operating Income Rs. Cr. 1134.02 1159.14
PAT Rs. Cr. (518.24) (442.99)
PAT Margin (%) (45.70) (38.22)
Total Debt/Tangible Net Worth Times (1.99) (2.54)
PBDIT/Interest Times (0.12) (0.05)
Status of non-cooperation with previous CRA (if applicable)
­None
 
Any other information
­None
 
Applicable Criteria
• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm
• Service Sector: https://www.acuite.in/view-rating-criteria-50.htm
• Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm
• Consolidation Of Companies: https://www.acuite.in/view-rating-criteria-60.htm
• Group And Parent Support: https://www.acuite.in/view-rating-criteria-47.htm
• Explicit Credit Enhancements: https://www.acuite.in/view-rating-criteria-49.htm
Note on complexity levels of the rated instrument
­In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
 
Rating History :
­Not Applicable
 
Lender’s Name ISIN Facilities Date Of Issuance Coupon Rate Maturity Date Quantum (Rs. Cr.) Complexity Level Rating
Not Applicable INE760I07011 Bond 11 Jun 2019 11.64 10 Jun 2029 40.30 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07029 Bond 28 Aug 2019 11.45 27 Aug 2029 50.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07037 Bond 14 Feb 2020 11.45 13 Feb 2030 100.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07045 Bond 21 Dec 2020 11.01 20 Dec 2030 50.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07052 Bond 11 Jan 2021 11.01 10 Jan 2031 50.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07078 Bond 18 Feb 2021 10.96 17 Feb 2031 49.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable INE760I07060 Bond 15 Jan 2021 11.01 14 Jan 2031 50.00 Simple ACUITE A- | CE | Stable | Assigned
Not Applicable Not Applicable Proposed Bond Not Applicable Not Applicable Not Applicable 240.70 Simple ACUITE A- | CE | Stable | Assigned
­

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