Fitch Publishes Adani Transmission's 'BBB-' Ratings: Rates INR Notes
OREANDA-NEWS. Fitch Ratings has published India-based Adani Transmission Limited's (ATL) Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB-'. The Outlook is Stable. At the same time, Fitch has assigned a Local Currency IDR of 'BBB-' with a Stable Outlook to ATL.
Fitch has also assigned the company's proposed Indian rupee-denominated senior secured notes payable in US dollars an expected rating of 'BBB-(emr)(EXP)'. Investors should note that, while the notes provide for coupon payments and settlement in US dollar at the prevailing rupee-dollar exchange rate, this is subject to transfer and convertibility risk on exchange operations involving the Indian rupee (and thus the rating can be no higher than India's Country Ceiling, currently 'BBB-').
The linkage of payments under the terms of the notes to the prevailing exchange rate means that Fitch does not regard the trustee's role in facilitating the conversion of currencies at the transaction's initiation and maturity as altering the underlying local-currency nature of the note. Fitch's 'emr' suffix has been applied to the local-currency rating of the notes to reflect the fact that upon maturity the investor is paid in US dollars rather than the currency of the notes.
The final rating on the notes is contingent upon the receipt of final documents conforming to information already received. The proposed notes are rated at the same level as ATL's Local-Currency IDR as they represent direct, unconditional, unsubordinated and secured obligations of the company.
KEY RATING DRIVERS
Supportive Regulatory Framework: ATL's credit profile benefits from a stable and favourable regulatory environment. Revenues for all its existing transmission assets are based on a cost-plus tariff, which provides long-term cash flow certainty and stability. India's regulators - both at national and state level - have a long track record of delivering predictable outcomes, including tariff formulas. The regulatory framework also provides some protection to transmission companies in their recovery of dues from weak customers, which is a problem that Indian transmission companies often face.
Availability-Linked Revenue Visibility: Transmission companies do not face risks associated with transmission volumes because they are guaranteed revenue, which is determined by the regulator, as long as they hit certain availability benchmarks. The low operating risk profile of the transmission assets and the strong operating performance of the company in excess of regulatory benchmarks, provides ATL with long-term revenue visibility.
ATL's four existing operating assets are licensed to operate for another 18-25 years; while the licenses for its three new greenfield projects will run for 35 years. The loss of revenue when a license expires is mitigated by the very long useful lives of the transmission assets and the high salvage value of the assets. The new concessions are based on a competitive tariff mechanism, which provides a lesser degree of protection compared with concessions under a cost-plus tariff model. Fitch expects ATL to maintain its track record of bidding prudently for new projects and ensuring adequate returns on new projects.
Exposure to Weak State Counterparties: State-owned power utilities from Maharashtra account for the majority of ATL's revenue, trade receivables and unbilled debtors. These counterparties are financially weak, although ATL's receivable position has improved following changes implemented by the Maharashtra state electricity regulator in June 2015 to motivate utilities to make payments punctually to transmission companies. Fitch expects the share of ATL's revenue exposed to Maharashtra will reduce over time with the commissioning of new projects. Overall, though, ATL's ratings remain susceptible to a material sustained deterioration in receivables from the Maharashtra utilities.
Adequate Forecast Credit Metrics: ATL's financial profile benefits from the stable revenue from its operating transmission assets and will be supported by the successful commissioning of three committed greenfield transmission projects over the medium term. Fitch expects ATL to maintain an adequate financial profile for its ratings over the medium term, after factoring in some additional capex. We expect ATL's fixed-charge coverage (defined as funds flow from operations fixed-charges) to be maintained around 2.3x-2.4x and leverage (defined as gross debt to EBITDA) to trend lower to 3.5x through 2020. Fitch expects ATL's ratio of gross debt (excluding working capital facilities) to fixed assets will not significantly exceed 80% over the medium term.
Structural Enhancements, Bond Issue: ATL's proposed bonds benefit from structural enhancements, which are achieved through various restrictions, such as limitations on incurrence on additional indebtedness, and features such as a defined cash waterfall. The obligor group for the notes will consist of ATL, the issuing entity, and two of its subsidiaries which own the four operational transmission assets. Additionally, the notes indenture includes restrictions on the business activities of the non-obligor subsidiaries of ATL and limits total investments to availability of reserves, as defined in the notes.
Fitch's key assumptions within the rating case for the issuer include:
- For operating projects, revenues are based on all relevant costs, regulated return on equity and incentive income linked to asset availability. For committed projects and uncommitted growth capex, both awarded and those to be awarded under tariff-based competitive bidding, returns are broadly in line with existing operational projects
- Forecast capex includes: (1) three committed projects of INR26bn under development over FY17 to FY19, and (2) annual uncommitted capex of INR6.75bn over the medium term
- Minimal dividend payments expected over the medium term
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Funds flow from operations fixed-charge cover below 2.2x
- Gross debt to EBITDA above 5.5x
- Gross debt (excluding working capital facilities) to fixed assets above 80%
- Sustained significant increase in receivable days
In addition, any negative rating action on India (BBB-/Stable), particularly India's Country Ceiling (BBB-), will also lead to negative rating action on ATL's Foreign-Currency IDR and the rating on the proposed notes.
Positive rating action is considered unlikely over the medium term. This is due to the significant capex ATL is likely to make over the medium term and as such, Fitch's view is that the company's credit metrics are unlikely to materially improve over this period.