Tatsat Chronicle Magazine

Bad News For Adani Continues; Moody’s Downgrades Four Companies To Negative From Stable

February 11, 2023
Adani

There was further bad news for the Adani group as global credit rating agency Moody’s Investor Services downgraded the ratings outlook of four of its companies to negative from stable. Moody’s downgraded its ratings outlook to negative from stable for Adani Green Energy; the Energy Restricted Group, which represents some of its other units; and two subsidiaries of Adani Transmission.

“These rating actions follow the significant and rapid decline in the market equity values of the Adani Group companies following the recent release of a report from a short-seller highlighting governance concerns in the group,” Moody’s said.

Moody’s revised downwards the rating outlook after a significant and rapid decline in market value following a report by US-based short seller Hindenburg Research. In a statement, Moody’s said the rating outlook for Adani Green Energy Ltd, Adani Green Energy Restricted Group, Adani Transmission Step-One Ltd and Adani Electricity Mumbai Ltd has been changed to negative from stable.

“These rating actions follow the significant and rapid decline in the market equity values of the Adani Group companies following the recent release of a report from a short-seller highlighting governance concerns in the Group,” it said.

The affirmation of AGEL’s senior secured bond rating reflects its predictable cash flow backed bylong-term power purchase agreements (PPAs), its large and diversified portfolio of solar and wind generation projects, and its very high financial leverage.

The change in the outlook to negative on AGEL considers the company’s large capital spending program and dependence on sponsor support, potentially in the form of subordinated debt or shareholder loans, which will likely be less certain in the current environment. The negative outlook also factors in the company’s significant refinancing needs of around $2.7 billion in fiscal year ending March 2025 (fscal 2025) and limited headroom in its credit metrics to manage any material increase in funding costs.

The affirmation of AGEL RG-1’s senior secured bond rating considers its predictable revenues from a diversified set of projects in India, operating under long-term PPAs with fixed tariffs. The AGEL RG-1’s underlying credit quality also reflects the uneven past performance of the restricted subsidiaries’ projects, and its high financial leverage.

The change in the outlook on AGEL RG-1 to negative factors in the refinancing risk associated with $500 million of bonds maturing in December 2024. Moody’s recognizes that the project finance structure of AGEL RG-1 provides protection from any contagion risk from the broader Adani Group.

The affirmation of ATSOL’s senior secured bond ratings reflects the company’s close credit linkage with its wholly-owned parent, Adani Transmission Limited (ATL), owing to the parental guarantee provided by ATL over the rated bonds and the event of default provisions linked to ATL’s solvency. ATL’s credit profle, in turn, reflects the predictable revenue from its diversified portfolio of quality regulated or contracted transmission and distribution assets, as well as the group’s aggressive growth strategy and the incremental debt required to fund its capital spending, the Moody’s said.

The change in the outlook on ATSOL to negative considers the modest headroom in ATL’s credit metrics relative to the minimum tolerance level under Moody’s base case scenario, which limits the group’s ability to withstand a material increase in funding cost or reduced funding access.

The affirmation of AEML’s senior secured bond ratings reflects the predictable revenue from its integrated utility business in Mumbai, all of which are regulated. At the same time, the rating affirmation considers AEML’s elevated financial leverage partly due to its large capital spending in recent years. The change in outlook to negative reflects the likely reduction in its funding access and reduced ability to manage any material increase in funding costs given the limited headroom in its credit metrics under Moody’s base case scenario.

The affirmation of APSEZ’s issuer ratings considers the company’s strong market position as the largest port developer and operator in India by cargo volume and its strong liquidity and financial profile. The stable outlook on the ratings reflects Moody’s expectation that APSEZ would continue to generate relatively steady cash fow over the next 12-18 months and would be able to realign its capital spending plans in the event of a liquidity squeeze.

The affirmation of AITCPL’s senior secured bond ratings considers the company’s strategic location and access to a large catchment area that generates strong origin-destination cargo demand. It also reflects the fully amortizing fixed-cost debt structure that helps to improve the company’s credit profile, its strong operating history and strong and committed shareholders.

The stable outlook on the ratings reflects the project finance features of the senior secured bonds including restrictions on debt incurrence and distributions, and the reserving of cash which supports debt servicing, which provide a ring fence from any contagion risk from the broader Adani Group.

The affirmation of AGEL RG-2’s ratings considers the group’s predictable revenues from a diversified set of projects in India, operating under long-term PPAs with fixed tariffs, and the group’s dependence on sovereign-owned entities, such as Solar Energy Corporation of India, for more than 70% of the offtake from its power projects. The stable outlook on the ratings reflects the project finance features of the senior secured bonds including restrictions on debt incurrence and distributions, the absence of growth capital spending requirement, the reserving of cash which supports debt servicing, which provide a ring fence from any contagion risk from the broader Adani Group, it said.

The affirmation of ATL RG1’s ratings factors in the group’s predictable revenues from a portfolio of transmission projects in India, operating under long-term transmission service agreements with fixed tariffs, the essential nature of the transmission grid as part of India’s decarbonization plans, and the group’s moderate financial leverage. The stable outlook reflects ATL RG1’s full amortization structure and absence of growth capital spending requirements, which minimize the need for additional funding from its shareholders or the capital markets. It further recognizes the ring-fencing in place to reduce potential contagion risk from the Adani Group.

The stable outlook on APSEZ, AICTPL, AGEL RG-2 and ATL RG1 further assumes that there will be no material adverse effect from any potential regulatory or legal investigations or increase in related party transactions to provide funding support to other group entities, the report said.

Given the negative outlook on AGEL, AGEL RG-1, ATSOL and AEML, an upgrade of the ratings is unlikely in the near term.

However, Moody’s could change the rating outlook to stable, if the entities can demonstrate their access to the capital markets to meet their growth funding and refinancing requirements; and if their management can effectively implement timely and effective countermeasures to preserve the companies’ credit metrics – including a reduction in capital spending or financial leverage with support from the promoter.

A revision in the outlook to stable is further predicated on there being no material increase in related party transactions to provide funding support to other group entities. The stable outlook further assumes that there will be no material adverse effect from any potential regulatory or legal investigations, Moody’s said.