Fitch Ratings has downgraded Azure Power Energy Ltd's (Azure RG3, previously referred to as RG1) US dollar bond to 'BB' from 'BB+' and Azure Power Solar Energy Private Limited's (Azure RG2) US dollar bond to 'BB-' from 'BB'.

All ratings remain on Rating Watch Negative. A full list of rating actions is below.

RATING RATIONALE

The downgrade reflects corporate governance concerns evident from prolonged failure of management to manage regulatory financial disclosures past statutory timeline. In addition, the Rating Watch Negative reflects the continued lack of clarity in relation to the impact of Azure Power Global Limited's (APGL) unresolved internal controls and compliance framework matters, and the recent changes in management, on overall performance and financial flexibility of the restricted groups.

APGL, the holding company of both Azure RG2 and Azure RG3, missed its statutory deadline in filing its Form 20-F audited financial statements for its financial year ended March 2022 (FY22) with the US Securities and Exchange Commission (SEC) in August 2022. However, there is still no clear indication on the group publishing its audited financial statement, and further delays could lead to delisting from the New York Stock Exchange.

That said, the ringfenced structure of the restricted groups, covenants and standard cash distribution waterfall provide some safeguard to bondholders from the implications stemming from a series of event at the APGL level. Both restricted groups have released their FY22 unaudited financial statements, while audited financial statements could only be released upon filing with the US SEC.

Azure RG2's rating headroom has also reduced significantly in light of continuing under-performance of the portfolio. The portfolio level generation remains about 6% lower than the P90 level. Continuing operational under-performance and/or material difference in audited financial statements will warrant higher stress in our rating case and may affect the credit assessment further. On the other hand, Azure RG3's operational and financial performance according to the unaudited numbers remain in line with our expectations.

KEY RATING DRIVERS

For an overview of the underlying credit profiles of Azure RG 1and Azure RG2, see the rating action commentaries published on 30 September 2021 and 24 October 2021.

ESG - Management Strategy: Management has failed to anticipate and manage regulatory financial disclosures on time. APGL cited 'ongoing review of its internal control and compliance framework' as the cause of the delay in filing its annual report with the US SEC. There has also been key management turnover at the group level.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Azure RG3

Continued material weakness in corporate governance;

Average annual debt-service coverage ratio (DSCR) during the refinance period dropping below 1.40x persistently.

Azure RG2

Continued material weakness in corporate governance;

Average annual DSCR during the refinance period dropping below 1.35x persistently.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The Rating Watch Negative will be removed if there are no material implications from management's operational and financial disclosures at the Azure RG2 and RG3 level. The ratings could be upgraded following our assessment of identified concerns in the disclosures.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Azure Power Energy Ltd has an ESG Relevance Score of '5' for Management Strategy due to management's failure to anticipate and manage regulatory financial disclosures on time, which has a negative impact on the credit profile. This is highly relevant to the rating, resulting in the downgrade. All ratings remain on Rating Watch Negative.

Azure Power Solar Energy Private Limited has an ESG Relevance Score of '5' for Management Strategy due to management's failure to anticipate and manage regulatory financial disclosures on time, which has a negative impact on the credit profile. This is highly relevant to the rating, resulting in the downgrade. All ratings remain on Rating Watch Negative.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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