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Rating Action:

Moody's assigns first-time (P)Baa2 to Adani Transmission Restricted Group's USD senior notes

13 Sep 2019

Singapore, September 13, 2019 -- Moody's Investors Service has assigned a first-time provisional rating of (P)Baa2 to the proposed 30-year USD backed senior secured notes to be issued under the newly established Adani Transmission Restricted Group (ATL RG).

ATL RG - which is Adani Transmission Limited's (Baa3 stable) new restricted group - comprises seven wholly owned subsidiaries: (1) Raipur-Rajnandgaon-Warora Transmission Limited, (2) Sipat Transmission Limited, (3) Chhattisgarh-WR Transmission Ltd, (4) Hadoti Power Transmission Service Limited, (5) Barmer Power Transmission Service Ltd, (6) Thar Power Transmission Service Ltd and (7) Adani Transmission (Rajasthan) Ltd (ATRL).

The rating outlook is stable.

The proposed notes will be issued by six of the seven restricted subsidiaries except for ATRL. The issuers will then on-lend part of the proceeds to ATRL. The restricted subsidiaries will use the proceeds to repay its existing senior debt, subordinated debt, capital creditors and general corporate purpose.

All seven restricted subsidiaries will be guarantors to the proposed notes, and the noteholders will be beneficiaries to a security package that includes assets, a pledge of the restricted subsidiaries' shares held by Adani Transmission, and an assignment of key project documents.

Collectively, ATL RG owns and operates seven electricity transmission assets in India.

The provisional status of the rating will be predicated on Moody's satisfactory review of the final transaction documentations, including the currency hedging mechanism and due diligence reports at issuance.

RATINGS RATIONALE

"The (P)Baa2 rating of the proposed USD notes reflects the credit quality of ATL RG, which is in turn supported by its stable revenues from a diversified set of transmission assets in India, operating under long-term transmission service agreements with set tariffs," says Spencer Ng, a Moody's Vice President and Senior Analyst.

"The rating also benefits from the transmission assets' solid operating track record across ATL RG and the broader Adani Transmission portfolio, as well as from the fully amortizing fixed cost debt structure, which further enhances the group's cash flow visibility," adds Ng.

Moreover, given that the terms of the proposed notes also restrict the RG from making distribution payments (1) if EBITDA derived from interstate assets regulated by the central regulator falls below 70%, or (2) if any of the restricted subsidiaries take on construction projects, there is a high degree of visibility in ATL RG's counterparty and business risk profile.

At the same time, the rating considers ATL RG's moderate financial leverage, and its exposure to financially weak state-owned utility companies, as well as residual exposure to INR/USD currency fluctuations.

Moody's projects that ATL RG's debt service coverage ratio (DSCR) will average around 1.4x over the term of the bond. The long-term projection assumes that -- on balance -- the RG will be able to renew its transmission licenses upon the maturity of their initial 25-year term, due to the on-going need for these assets as part of India's central transmission grid.

To mitigate the currency risk stemming from the absence of USD revenues, which are needed to service the proposed USD notes, ATL RG will enter into rolling 5-year currency swaps from financial close to manage the INR/USD exchange rate movements. According to management, ATL RG is contractually obligated to retain any gains realized at each swap roll-over in a dedicated reserve account, to offset any corresponding increases in its INR-denominated debt servicing obligations caused by a decline in the Indian Rupee.

The (P)Baa2 rating is predicated on a successful implementation of the proposed hedging strategy to substantially insulate ATL RG from currency risk.

All of ATL RG's revenues are derived from long-term transmission service agreements with state-owned distribution and transmission companies, most of which show weak financial profiles. Nevertheless, ATL RG's exposure to counterparty risk is manageable, due to (1) the presence of a supportive payment pooling mechanism for transmission lines in India, which reduces ATL RG's exposure to individual counterparties, and (2) the protective covenants under the proposed notes.

The terms of the proposed USD notes include restrictions on ATL RG's payments to the parent and other group entities, debt incurrence and a forward-looking cash sweep mechanism; which will enhance the resilience of ATL RG's financial metrics in a downside scenario. However, given the headroom between the projected credit metrics under Moody's base case scenario and the covenant thresholds, these supportive provisions would alleviate - but not insulate - ATL RG from unexpected challenges.

The USD notes will be secured by a first-priority pledge of the restricted subsidiaries' shares, the moveable and immovable assets of the restricted subsidiaries and assignment of key project documents. The proposed notes will be cross guaranteed by each of the restricted subsidiaries.

The stable rating outlook reflects Moody's expectation that ATL RG will continue to exhibit DSCR consistent with the tolerance level set for its (P)Baa2 rating over the next 12-18 months, supported by its long-term Transmission Service Agreements and high EBITDA margin operation.

Moody's does not expect to upgrade the rating, given limited opportunity available to ATL RG to meaningfully increase its revenue organically. That said, Moody's could upgrade the bond rating if ATL RG's DSCR increases to above 1.75x on a consistent basis and if there is an upgrade to the sovereign's Baa2 rating.

The rating could come under downward pressure if ATL RG's DSCR profile deteriorates towards 1.35x on a sustained basis, which could result from any residual exposure to long-term currency depreciation or an unremedied off-taker default.

Moody's could also downgrade the rating if there are signs pointing to a decline in the essentiality of ATL RG's lines as part of the transmission grid, or if the sovereign rating is downgraded from Baa2, given that ATL RG's operations are based entirely in India.

The principal methodology used in these ratings was Generic Project Finance published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Adani Transmission Restricted Group comprises seven operating subsidiaries of Adani Transmission Limited. Collectively, the restricted subsidiaries operate seven unregulated transmission assets that span over 2,084 circuit kilometers across four states in India.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Spencer Ng
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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