Moody's Investors Service has today revised the outlook on Adani Transmission Limited
's (ATL) rating to stable from negative.
At the same time, Moody's has affirmed ATL's Baa3 senior secured bond ratings. ATL, based in Ahmedabad, is the largest private-sector participant in India's power transmission market.
"The change in ATL's outlook to stable reflects the expected improvement in the company's financial position over the next 12-18 months, underpinned by incremental earnings contributions from the Mumbai integrated utility business acquired last year and recently completed greenfield projects," says Spencer Ng, a Moody's Vice President and senior analyst.
"The change in outlook also considers the partial equity credit ascribed to subordinated loans from its promoter, after factoring in recent changes made to the terms of these instruments," adds Ng.
Over the next 12-18 months, Moody's expects the company's consolidated funds from operations (FFO) to net debt to improve to the mid-7% range, which is above -- but would remain close to -- the minimum tolerance level of 7% set for the bonds' Baa3 ratings, after factoring in additional debt to be incurred to help fund capital expenditure.
The affirmation of the Baa3 senior secured bond ratings considers ATL's predictable cash flow profile that is underpinned by the stable and mature regulatory framework for the power transmission and distribution industry in India, the company's solid operating track record, its sizable asset portfolio, which in turn supports its capacity to partially fund capital expenditure with retained operating cash flow, and its exposure to execution risk and funding requirements, given ATL's ambitious growth plans.
The company's medium-term credit profile will likely be driven by its growth strategy and funding plans. In particular, a material increase in higher risk investments outside of ATL's core transmission and distribution business, or a shift from its commitment to fund at least 30% of future capital expenditure through retained cash flow or committed equity infusion, could exert negative pressure on its rating.
ATL expects annual capital expenditure to increase to INR25-30 billion over the next two years, which would create a material funding requirement for the company. At the same time, ATL's actual capital spending requirement will depend on the regulatory determination for the Mumbai utility business in April 2020, and the company's success in winning new greenfield bids to add to the four transmission line projects already underway.
ATL's financial position could improve further if it completes its planned equity raising in the second half of 2019, and applies part of the proceeds to repay some of the outstanding loans from its promoter. The additional buffer in its leverage position that would result from these repayments would provide ATL with greater flexibility to pursue its growth initiatives.
"The ratings also recognize the commitment of ATL's management and its promoter to maintain an investment-grade rating profile, as evidenced by the promoter's capital infusion in April to strengthen the company's liquidity profile," adds Ng.
As a transmission and distribution network operator, ATL is exposed to some degree of bushfire risk given that its network spans forest areas. If this risk materializes, Moody's expects ATL would have some capacity to recover the cost of replacing damaged equipment through the regulatory framework and insurance coverage, although the sufficiency of these covers to replace damaged assets and pay potential compensation to third parties is untested. According to ATL, its transmission assets have not been affected by bushfires in the last decade.
The Baa3 senior secured bond ratings are unlikely to be upgraded prior to the company's planned equity raising, given its high financial leverage and ambitious growth plans. Over time, the rating could be upgraded if consolidated FFO/net debt improves to above 16% on a sustained basis with no material change in the group's business focus on electricity transmission and distribution.
On the other hand, the bond ratings could be downgraded if FFO interest coverage falls below 1.75x and/or FFO/net debt falls below 7% on a sustained basis. The ratings could also come under pressure if there is a deterioration in ATL's business risk profile, which could result from a material rise in the group's exposure to higher-risk businesses outside of its core regulated portfolio.