S&P: Adani Transmission Ltd. And Senior Secured Notes Assigned 'BBB-' Ratings; Outlook Stable
"The rating on ATL reflects our expectations of stable cash flows, driven by a favorable regulatory environment, the company's power transmission business, and its good operating record," said S&P Global Ratings credit analyst Mehul Sukkawala. "However, the company is dependent on two key assets, exposed to somewhat weak counterparties, and has a short track record of operations."
The rating also reflects our expectation that ATL's growth aspirations will be moderated by the company's legal and management commitment to limit the investment and support to new projects.
We have a favorable view of the central regulator, Central Electricity Regulatory Commission (CERC), and Maharashtra state regulator, Maharashtra Electricity Regulatory Commission (MERC), which administer the tariff for the company's current portfolio of transmission assets. We believe ATL benefits from a predictable tariff-setting mechanism, which results in stable cash flows.
ATL has a short but good record of project execution and operating its asset portfolio. The company has a consistently good plant availability rate of more than 99.5%, allowing it to earn incentives under regulations. Its profitability has also been above average, with EBITDA margins of more than 90% and return on capital of about 15%, which is much higher than other regulated transmission assets. However, the company has few assets, and they have been operational for less than four years.
ATL is of moderate size, but faces asset and customer concentration as well as counterparty risk. ATL also faces asset concentration, considering two transmission lines account for about 90% of cash flows. In addition, the company is exposed to higher risk from customer concentration, with Maharashtra state accounting for about 60% of the company's cash flows. We believe Maharashtra state has a weak credit profile, which in the past has resulted in significant buildup of receivables. The recurrence of collection delays could weaken ATL's leverage and liquidity position.
We expect ATL to maintain its fair leverage with stable cash flows. We also expect ATL's growth aspirations to be offset by the company's legal and management commitment to limit the investment and support to new projects. Our expectation of stable cash flows reflects the operating nature of these transmission assets, good operating efficiency, stable regulatory environment, and lack of any material regulatory uncertainty. This allows ATL to withstand somewhat higher leverage. In addition, we believe the company will hedge more than 90% of its foreign currency debt to ensure that currency risk is immaterial.
At the same time, the legal and management commitment is the key driver for our expectations on financial ratios to remain commensurate with our expectations for the rating. This is especially because we expect ATL to focus on organic growth by acquiring new projects offered by the government through a tariff-based auction. However, we expect management to balance the use of cash generated from operations to maintain a ratio of funds from operations (FFO) to debt of at least 15%.
Under the commitments as part of the common terms deed (CTD), the obligor group will limit its investment to existing free cash flows, and any additional debt will not be to the detriment of its credit profile. The deed would insulate the obligor group from the risk related to under-construction projects and apply limitations on cash deployment through waterfalls. It would also limit the company's ability to raise additional debt unless it meets certain covenants and does not adversely affect its credit profile.
"The stable outlook reflects our expectation that ATL's operating performance will remain stable without any significant adverse regulatory developments, resulting in an FFO-to-debt ratio of at least 15%," said Mr. Sukkawala. The outlook further encapsulates our view that the company will appropriately manage the rollover of its commercial paper which will reduce over time. Finally, it reflects our stable outlook on the sovereign credit rating on India.
We could lower the rating if ATL's financial position weakens on account of adverse regulatory decisions, aggressive investments that would significantly reduce cash accumulation, or lower operating performance. This could be indicated by our expectations of the FFO-to-debt ratio remaining below 15% for a prolonged period.
We could also lower the rating if ATL's liquidity position weakens on account of higher dependence on short-term debt, such as commercial paper, or a delay in tariff collections.
We could also lower the rating if we lower the sovereign credit rating on India.
We are unlikely to raise the rating over the next 18-24 months. For an upgrade, we would need to see ATL establish a track record of stable operating performance and financial ratios in line with current expectations. It would also require the sovereign credit rating to be raised to 'BBB'.