ECONOMYNEXT – Several Adani group firms have been put on negative rating watch by Fitch as Sri Lanka said it has called for reports on the group’s projects in the country following bribery charges being filed in the US linked to a solar project in India.
Adani Ports and Special Economic Zone Limited’s (APSEZ), which is involved in a port terminal in Sri Lanka has been put on rating watch negative along with bond sold by North Queensland Export Terminal Pty Ltd and Mumbai International Airport Limited.
The outlooks of two special purpose vehicles linked to Adani Green Energy Limited, which has been awarded a wind power project without tender in Sri Lanka has been cut to negative.
“While the US indictment mainly involves AGEL’s key leadership, the proceedings and the outcome could reflect significantly weaker corporate governance practices of the group and can lead to further negative rating actions,” Fitch Ratings said.
“Two of the indicted board members belong to the founding shareholders of Adani group, which effectively own a majority of shares in all rated group entities (except AICTPL).
“These directors also serve on the boards of most other rated entities, raising contagion risk and renewing governance concerns across the group.
“We will monitor the ongoing investigations for developments impacting financial flexibility of the rated entities, particularly any material deterioration in near- to medium-term funding access, including their ability to roll over existing credit lines or access new facilities, as well as potentially higher funding costs.”
Sri Lanka’s cabinet spokesman, Media Minister Nalinda Jayatissa said the Foreign and Finance Ministry is looking into the matter and reports have been called from ministries involving Adani projects.
The Fitch statement is reproduced below:
Fitch Takes Negative Rating Actions on Adani Group’s Infrastructure Entities and Restricted Groups
Mon 25 Nov, 2024 – 8:04 PM ET
Fitch Ratings – Hong Kong – 25 Nov 2024: Fitch Ratings has taken the following rating actions on the Adani group’s entities rated under Fitch’s Infrastructure and Project Finance Rating Criteria listed below, following the bribery charges and indictment of certain board members of Adani Green Energy Limited (AGEL) by the US Securities and Exchange Commission and Department of Justice.
The following ratings have been placed on Rating Watch Negative (RWN):
– Adani Ports and Special Economic Zone Limited’s (APSEZ) Long-Term Foreign-Currency IDR of ‘BBB-‘ and the ‘BBB-‘ rating on its US dollar senior unsecured bonds;
– The ‘BB+’ rating on North Queensland Export Terminal Pty Ltd’s (NQXT) Australian dollar senior secured bonds; and
– The ‘BB+’ rating on Mumbai International Airport Limited’s (MIAL) US dollar senior secured bonds.
The following ratings have been affirmed and the Outlook revised to Negative from Stable:
– The ‘BBB-‘ rating on Adani International Container Terminal Private Limited’s (AICTPL) US dollar senior secured bonds;
– The ‘BBB-‘ rating on Adani Green Energy Limited Restricted Group 1’s (AGEL RG1) US dollar senior secured bonds;
– The ‘BBB-‘ rating on Adani Green Energy Limited Restricted Group 2’s (AGEL RG2) US dollar senior secured bonds; and
– The ‘BBB-‘ rating on Adani Energy Solutions Limited Restricted Group’s (AESL RG) US dollar senior secured bonds.
RATING RATIONALE
The RWN on APSEZ, NQXT and MIAL reflects increased corporate governance risk and potential contagion risk that could impact funding access and liquidity of the rated entities, if corporate governance risk materialises following the US indictment. On 20 November 2024, three AGEL board members were indicted by US authorities for alleged bribery and providing false and misleading statements to investors in a 2021 offshore note offering. The group has denied these allegations.
While the US indictment mainly involves AGEL’s key leadership, the proceedings and the outcome could reflect significantly weaker corporate governance practices of the group and can lead to further negative rating actions. Two of the indicted board members belong to the founding shareholders of Adani group, which effectively own a majority of shares in all rated group entities (except AICTPL). These directors also serve on the boards of most other rated entities, raising contagion risk and renewing governance concerns across the group.
We will monitor the ongoing investigations for developments impacting financial flexibility of the rated entities, particularly any material deterioration in near- to medium-term funding access, including their ability to roll over existing credit lines or access new facilities, as well as potentially higher funding costs.
The affirmation of ratings of AGEL RG1, AGEL RG 2, AESL RG and AICTPL reflects the ring-fencing structure of these restricted groups, their relatively stable operating cash flows and their almost fully amortising debt, which will minimise any impact from reduced funding access that could arise from potential contagion effects. The Negative Outlook reflects the risk of higher funding costs and materialisation of weakness in corporate governance and internal controls.
Long-term contracts support the revenues of AGEL RG1, AGEL RG2 and AESL RG and limit downside to Fitch’s current revenue risk assessments. AICTPL has a long-term terminal service agreement with Mediterranean Shipping Company S.A. (MSC), under which MSC is required to use AICTPL when its container ships call at Mundra Port, subject to AICTPL’s availability, which reduces revenue volatility. These, together with covenants under issuance structures that limit distributions and any additional indebtedness, continue to support the ratings of the above four entities.
Fitch has simultaneously withdrawn the expected ratings on the proposed debt issuance by Adani Green Energy Limited Hybrid RG1 (AGEL Hybrid RG1) as the issuance is no longer expected to proceed as previously envisaged.
KEY RATING DRIVERS
Near-Term Liquidity Risk Limited: Fitch expects the near-term liquidity of the rated entities to be sufficient, as there are no significant scheduled debt maturities in the next 12-18 months (except NQXT) and the entities have some capex flexibility. We believe the charges may hinder NQXT’s planned refinancing, including raising funding costs, curbing interest from private lenders and extending due diligence requirements. However, we expect limited refinancing risk given the ultimate shareholder’s (Adani Family Trust) past support, underpinned by strong economic incentives, NQXT’s positive free cash flow (FCF) and the moderate size of the funding requirement.
APSEZ’s cash balance of INR89 billion at end-September 2024 and its FCF should cover its current debt maturities of INR113 billion to the financial year ending March 2026 (FY26), with next major US dollar bond due in July 2027. APSEZ also has flexibility to adjust its capex. The liquidity of AICTPL, AGEL RG1, AGEL RG2 and AESL RG is supported by the nearly fully amortising nature of their debt, legal ring-fencing, cash flow waterfall mechanisms, covenants that restrict cash upstreaming and limit indebtedness, and stable cash flows.
Risks to Medium-Term Funding Access: We believe the latest developments could hinder the group’s funding access. This can significantly affect the growth plans for certain rated entities like APSEZ, though it has some flexibility in its capex plans. Increased reliance on onshore funding, following reduced offshore funding, could heighten refinancing risk over the medium term, and a material rise in funding costs could reduce operating cash flows.
The impact of a material deterioration in the group’s funding access is likely to be limited for AGEL RG1, AGEL RG2, AESL RG and AICTPL. The largely fully amortising debt and covenants in the form of dividend lock-up two to three years prior to final maturity mitigate refinancing risk and limit the need for any additional funding. There may be some effects on hedging contract renewals for the US dollar bonds of AGEL RG1, AGEL RG2 and AESL RG, but covenants under the bonds limit downside.
Heightened Corporate Governance Risk: Fitch assesses that the misrepresentation and bribery charges have heightened corporate governance risk for the rated entities. A conviction or any indication of weaknesses in the entities’ governance practices and internal controls that may come to light as part of the process could put pressure on the ratings.
Fitch currently has an ESG Relevance Score of ‘4’ for Governance Structure and Group Structure on the rated entities and has AICTPL’s scores for the above two factors to ‘4’ from ‘3’ in light of the recent developments.
