Servicing of the proposed bonds will be supported by a newly formed obligor group that includes AEML and Power Distribution Services Limited (PDSL). Both AEML and PDSL are wholly owned subsidiaries of Adani Transmission Limited (ATL, Baa3 stable).
Proceeds from the proposed bonds - together with a capital infusion of USD282 million (Rs20 billion) in the form of subordinated shareholder loans - will be used to repay all existing senior debt at AEML except for senior working capital facilities, with any excess amount to be used for general corporate purposes.
AEML owns and operates ATL's integrated utility business in Mumbai. PDSL provides specialized network services as well as certain back-office services to AEML.
The provisional status of the rating will be predicated on Moody's satisfactory review of the final transaction documentation, the currency hedging mechanism and due diligence reports at issuance.
"The (P)Baa3 rating of AEML's proposed USD bonds takes into account the mature and transparent regulatory framework under the state regulator, Maharashtra Electricity Regulatory Commission - a factor which underpins AEML's predictable cash flow profile - the quality of AEML's diversified customer base in Mumbai, and the solid operating track record of its integrated utility business," says Spencer Ng, a Moody's Vice President and Senior Analyst.
Around 90% of the obligor group's cash flow comes from AEML's regulated utility business in Mumbai, with the balance coming from PDSL. AEML's revenue is regulated by the Maharashtra Electricity Regulatory Commission under a building block framework which has a track record of providing a consistent regulated return on capital invested and allowing recovery of prudent costs over multi-year tariff control periods.
The Maharashtra Electricity Regulatory Commission's regulations also allow AEML to recover revenue shortfall due to lower-than-expected energy sales, and changes in fuel and energy procurement cost through periodic tariff adjustments. These protections help reduce the company's exposure to commodity and demand risk.
AEML's rating is constrained at the (P)Baa3 level, however, by its high financial leverage, and exposure to competition from another licensed distributor in its catchment area.
Over the next three years, Moody's expects the obligor group's financial leverage - as measured by funds from operations (FFO)/debt - to remain at around 10%, a result which would be above the minimum tolerance level set for its (P)Baa3 rating of 9%. Moody's projections incorporate (1) partial equity treatment for the proposed shareholder loans, and (2) additional debt required to help fund its substantial capital expenditure plans.
The shareholder loan will be provided by a wholly-owned subsidiary of the Qatar Investment Authority (QIA), as part of a definitive agreement QIA has entered into to acquire a 25.1% equity interest in AEML from ATL (the QIA transaction) in December 2019. Management expects the QIA transaction to complete at around the same time as the proposed bond issue, conditional upon receiving the necessary regulatory approval.