ECONOMYNEXT – The outlook of several Adani companies which are affiliates or parents of project companies in Sri Lanka have been cut to negative by S&P Global Ratings, after corruption and fraud charges were filed in the US against the group.
The outlook of the BBB- rating of Adani Ports and Special Economic Zone Ltd, which is linked to a terminal project at Colombo port was cut to negative.
Adani Green Energy Limited (AGEL), which is promoting a controversial wind power project in Sri Lankaâ€s Mannar area was not rated by S&P but the outlook of its financing SPV, Adani Green Energy Ltd Restricted Group 2, was cut to negative.
US prosecutors filed charges against the Adani group and several senior executives alleging they bribed Indian officials to get solar power deals. Adani has denied the allegations.
“The allegations could renew questions over the groupâ€s governance practices and damage its reputation,†S & P said.
“We will watch for any signs of weaker funding access or concerns from existing lenders–which could be demonstrated by the lowering of funding limits, nonrenewal of facilities, or significantly higher credit spreads.
“A U.S. indictment of three board representatives of an unrated Adani group entity could affect investor confidence in other Adani group entities (because the founder is on the board of multiple entities within the group), thereby potentially impairing their funding access and increasing their funding costs.â€
The full statement is reproduced below:
SINGAPORE (S&P Global Ratings) Nov. 22, 2024–S&P Global Ratings today took the rating actions listed above.
U.S. prosecutors†indictment of senior Adani Group leadership could affect the groupâ€s funding access.
The allegations could renew questions over the groupâ€s governance practices and damage its reputation. We will watch for any signs of weaker funding access or concerns from existing lenders–which could be demonstrated by the lowering of funding limits, nonrenewal of facilities, or significantly higher credit spreads.
News of the indictment broke overnight, and thereafter, equity and bond prices across Adani group companies have fallen sharply.
The group has cancelled a US$600 million concluded bond sale. This indictment is independent of, but follows, a short-seller report last year, which hit equity and bond prices across the group although these had subsequently recovered. The group has denied the allegations and asserted that they are baseless.
The group will need regular access to both equity and debt markets given its large growth plans, in addition to its regular refinancing.
We believe domestic, as well as some international banks and bond market investors, look at Adani entities as a group, and could set group limits on their exposure. This may affect the funding of rated entities. We note that the rated entities have no immediate and lumpy debt maturities.
If allegations of illegal activities or misleading statements prove true, we could assess the groupâ€s governance more negatively.
This is because ownership of most Adani Group entities is held by the same promoters, related-family entities, and trusts. The chairman of AGEL, one of the board members under investigation, is the founding promoter and is on the board of multiple Adani group entities. The presence of Adani family members among the groupâ€s boards of directors and senior management (including CEOs) means they can significantly influence the business strategy, growth plans, financial policies, reporting, and disclosures of operating entities. Different group companies share some of the same managers among the treasury, finance, and technical divisions.
In addition, we believe that if the allegations are proven, it could have some bearing on the companyâ€s operations over time.
This could occur if there is a review of relationships with the government agencies that award concessions and licenses, or with offtakers and counterparties such as Solar Energy Corp. of India (SECI), state distribution companies, and joint venture partners.
That said, the Adani companies we rate have long-established infrastructure assets with strong fundamentals and cash flows.
This is underscored by the entities†good competitive position (Adani Ports) or regulated assets with assured returns (Adani Electricity). The firms currently have sufficient cash flows, adequate liquidity, and face no significant refinancing needs. Adani Ports repaid its maturities in July 2024 from own funds. We do not rate AGEL.
Direct linkage of AGEL to the ongoing investigation raises risks for AGEL RG2.
This is a direct subsidiary of AGEL, the entity mentioned in relation to charges under the U.S. Department of Justice indictment. Despite project finance ring fencing, we believe this linkage could affect the ability of companies such as AGEL RG2 to renew hedging contracts, which have a current tenor of three years, for their U.S. dollar bond, even though they are not exposed to refinancing risk. Hence, we revised the outlook to negative despite the debt being fully secured and the presence of cash flow waterfalls that prioritize operating expenditure and debt service over distributions. However, the rating action did not affect the rated debt issued by the other Adani entity project finance companies: Adani International Container Terminal Pte. Ltd. (AICTPL, BBB-/Stable), and North Queensland Export Terminal Pty Ltd. (NQXT, BB/Stable).
We already incorporate NQXTâ€s refinancing risk in our rating; our assessment of its liquidity as less than adequate results in a -1 notch adjustment.
We apply this adjustment because it has debt of A$329 million that is due to mature within the next 12 months and the portâ€s ratio of sources to uses of funds is less than 1.0x over this period. The port intends to complete its refinancing by January 2025. A further delay is likely to increase liquidity risk and exert further downward rating pressure as the next maturity date approaches.
AICTPL is a 50/50 joint-venture with Terminal Investment Ltd. (TIL; not rated).
The involvement of TIL as a partner provides independent oversight, especially when coupled with board seats. AICTPL has no hedging risk with U.S. dollar-linked revenue and its U.S. dollar bond will fully amortize over the period to 2031. In addition, the project has not further funding requirements or large capital expenditure needs.
The negative outlook on Adani Electricity, Adani Ports, and AGEL RG2 reflects the potential impact of the indictment on funding access and governance risks for the larger Adani Group.
The stable outlook on our long-term issue rating on NQXTâ€s senior debt indicates that the project has predictable cash flow based on take-or-pay contracts and cost passthrough mechanisms. After factoring in the revised debt limits and scheduled principal and interest payments to 2030, the project will have a minimum debt service coverage ratio (DSCR) of 1.55x.
The stable outlook on our long-term issue rating on AICTPL indicates that we expect it to maintain predictable cash flow based on fully market-based pricing and volume over the next 12-24 months. We forecast that the minimum DSCR, as calculated by S&P Global Ratings, will be 1.73x (excluding the last period, which is to be paid out of reserves).
Adani Electricity, Adani Ports, and AGEL RG2:
We could lower our rating on Adani Electricity, Adani Ports, and AGEL RG2 if we see signs that the ongoing investigation is significantly weakening funding access and increasing funding costs. If the group proves less able to raise funds; its support from banks weakens; or the cost of funding increases, we could reassess its liquidity position.
We could also lower our ratings on these entities if the allegations prove to be true.
Finally, the rating could come under pressure if we reassess our view of the groupâ€s governance, business position, or if operational performance deteriorates.
NQXT:
We may lower the rating on NQXT if it fails to refinance its bullet maturities well ahead of time. We could also lower this rating if our base-case minimum DSCR dips below 1.55x or if we see a material increase in the business risks associated with the coal terminal, by more than we currently expect.
In our view, this could occur if:
• Contracted tariffs or volume are materially lower;
• The nature of contracts materially changes;
• One or more shippers cannot be replaced; or
• Borrowing costs increase.
AICTPL:
We could lower the rating on AICTPL if the minimum DSCR, based on our calculations, is expected to fall below 1.60x. This could occur if:
• Volume or tariffs deteriorate sharply from our base case;
• Operating challenges lead to significant and sustained disruption of its port-handling capacity; or
• Mundra loses market share due to ramping up of capacity in local or regional competing ports.
We could also lower the rating if we lowered the sovereign credit rating on India (BBB-/Positive/A-3).
Adani Electricity, Adani Ports, and AGEL RG2:
We could revise the outlook on Adani Electricity, Adani Ports, and AGEL RG2 to stable if the groupâ€s funding access is unaffected and the U.S. DoJ investigation indicates that the groupâ€s management was not engaged in wrong-doing.
NQXT:
We could raise the rating if:
• We revise the liquidity assessment to adequate and the minimum DSCR remains at or above 1.55x. This could happen if NQXT finalizes refinancing for the upcoming A$329 million maturity and the projectâ€s debt service reserve account holds an amount sufficient to service principal and interest for at least six months; or
• Improved cash flow or reduced debt causes our forecast minimum DSCR to rise above 1.6x with a better downside resiliency assessment, and the project successfully refinances its debt maturity.
AICTPL:
We consider an upgrade to be unlikely over the next 12-24 months, because the rating on AICTPL will remain constrained by our ‘BBB-‘ sovereign rating on India. In addition, we do not expect AICTPLâ€s stand-alone credit profile (SACP) to improve, given that its overall financial metrics are constrained by the large balloon payment.
Nevertheless, we could raise the rating if:
• We raise the sovereign credit rating on India to ‘BBB†from ‘BBB-‘; and
• We view AICTPLâ€s SACP as ‘bbb†or higher.
The latter could occur if:
• Our analysis of AICTPL under our sovereign default stress test shows that it can repay its debt, even if there is a foreign-currency-denominated sovereign debt default (see “Ratings Above The Sovereign–Corporate And Government Ratings: Methodology And Assumptions,†published Nov. 19, 2013); and
• We anticipate that the minimum DSCR under our base case will remain above 1.75x and consider downside resilience to be high.
