Singapore, September 14, 2022 -- Moody's Investors Service has affirmed the Baa3 senior secured bond ratings of Adani Transmission Step-One Limited (ATSOL). The rated bonds were transferred to ATSOL from Adani Transmission Limited (ATL), its wholly-owned parent, following the substantial completion of an internal restructuring of the obligor group.
At the same time, Moody's has assigned a stable outlook.
The rated ATSOL bonds are serviced by a new ATSOL obligor group (ATSOL OG) that includes ATSOL and two of its fully owned subsidiaries, Maharashtra Eastern Grid Power Transmission Company Limited and Adani Transmission (India) Limited. Together, the two subsidiaries operate four regulated transmission lines of more than 5,000 circuit kilometers.
ATSOL was established to facilitate an internal corporate restructure that involves ATSOL replacing ATL as the issuer of the rated bond and becoming the intermediary holding company for the two operating subsidiaries within the obligor group. Following the restructuring, ATL will no longer part of the obligor group.
ATL have received the final consent required for the restructure in September, and the remaining administrative process will likely conclude in coming days.
"The affirmation of the Baa3 bond ratings and the stable outlook reflect the close credit linkage between ATSOL and ATL, given (1) ATL's parent guarantee over the rated bonds and the cross-default provisions within the bond documents; and (2) ATL's control over ATSOL's dividend policy and bond refinancing in 2026, which are key drivers for the obligor group's medium-term financial profile," says Spencer Ng, a Moody's Vice President and Senior Credit Officer.
ATL's credit profile, in turn, reflects (1) the predictable cash flow from the group's portfolio of quality transmission and distribution (T&D) assets, most of which are regulated; (2) the group's solid operating track record; and (3) the manageable exposure to counterparty risks given the presence of a payment-pooling mechanism and its diverse retail customer base in Mumbai.
RATINGS RATIONALE
These credit strengths are counterbalanced by the group's high financial leverage and its exposure to execution risks associated with its substantial capital spending program.
Moody's expects management to continue using cash flow available at ATSOL OG after debt servicing to help fund the capital spending requirements at other ATL group entities, considering the material headroom in ATSOL's credit metric relative to the threshold set for restricted payment in the bond documents. In return, the ATSOL bonds will benefit from the parent guarantee provided by ATL.
Moody's expects ATL's consolidated funds from operations (FFO)/net debt to trend above its rating tolerance level of 7.5% over the next two to three years, as existing projects that are scheduled to be commissioned over the next 18-24 months start generating cash flow.
Moody's expects the group to continue evaluating and bidding for new greenfield transmission projects, beyond the currently committed projects. Management will likely use the necessary capital management levers to maintain the stability of ATL's capital structure and current credit quality, such as the USD500 million equity raising completed in the first half of 2022.
ATL has sufficient liquidity to meet its operating needs over the next 12 months, although it will likely require additional debt for the greenfield projects added during the past nine months. Moody's expects such risks to be manageable, given the group's access to capital markets and the likely support from its promoter, if required.
The Baa3 ratings of the ATSOL bonds have not factored in any potential impact from an adverse arbitration outcome relating to a claim recently filed against ATL and its subsidiary Adani Electricity Mumbai Limited (AEML, Baa3 stable) by Reliance Infrastructure, because of the limited details available over the nature of the dispute and the uncertainties over the arbitration outcome and its timing. The credit impact will be considered and incorporated into the ratings as more information becomes available.
The stable outlook reflects Moody's expectation of improving credit metrics for ATL over the next 12-18 months as the group commissions new projects as planned and effectively recovers the regulated revenue shortfalls in its Mumbai distribution business in the upcoming tariff review.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade to the bond ratings is unlikely due to the group's large capital spending program and related financing requirements, which will likely keep credit metrics at the lower end of the range appropriate for the rating over the next 2-3 years. A rating upgrade will also likely require an upgrade to the sovereign rating given ATL's domestically focused business.
On the other hand, Moody's could downgrade the bond ratings if there is evidence that ATL's consolidated FFO/net debt cannot stay above 7.5% on a sustained basis after March 2024.
The ratings could also come under pressure (1) if ATL's business risk profile deteriorates, which could arise from a material increase in the group's exposure to higher-risk businesses outside its core regulated portfolio, (2) if the group provides funding support to other promoter group entities through related-party loans or other similar transactions or (3) if there are any adverse impact from the AEML arbitration.
The principal methodology used in these ratings was Regulated Electric and Gas Networks published in April 2022 and available at https://ratings.moodys.com/api/rmc-documents/386754. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The rated bonds are issued by an obligor group that includes Adani Transmission Step-One Limited (ATSOL) and two of ATL's fully owned subsidiaries, Maharashtra Eastern Grid Power Transmission Company Limited and Adani Transmission (India) Limited. Together, the subsidiaries operate four transmission lines across the country with a network of more than 5,000 circuit kilometers. ATSOL is a wholly owned subsidiary of ATL.
Outside of the ATSOL obligor group, ATL owns and operates other transmission assets and an integrated utility business in Mumbai through its 74.9% interest in Adani Electricity Mumbai Limited (Baa3 stable). Based in Ahmedabad, ATL is the largest private-sector participant in India's power transmission chain. Close to 74% of the ATL's equity is held by its promoter, the Adani Group.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
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Spencer Ng
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Singapore Pte. Ltd.
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Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
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