Fitch Ratings: Equity infusion to improve Adani Transmission's rating headroom

12 Apr 2022 , 03:14 PM

A USD500 million investment in Adani Transmission Limited (ATL, BBB-/Negative) by International Holding Company (IHC), the investment arm of the Abu Dhabi royal family, will increase ATL’s rating headroom by improving its leverage and coverage ratios, Fitch Ratings says.

The Adani Group said that IHC aims to invest USD2 billion in three group companies, of which USD500 million will be invested in ATL for an equity stake of 1.41%, on a post-issuance basis. The investment is subject to regulatory and shareholders’ approval and ATL expects it to be completed within a month of the board approval attained on April 8, 2022. ATL aims to use the proceeds primarily for capex and prepayment of existing borrowings.

After IHC’s investment, Fitch expects ATL’s net leverage, measured as net debt/EBITDA, to improve to 5.0x in the financial year ending March 2023 (FY23), lower than our earlier expectation of 6.4x (FY22 estimate: 6.0x) and below the downgrade trigger of 6.0x. Similarly, we expect net coverage, measured as EBITDA to net interest expense, to improve to 2.1x (FY21: 4.3x) from our earlier expectation of 1.9x (FY22 estimate: 2.1x) and exceed the downgrade trigger of below 2.0x.

We expect improvement in the rating headroom to persist during FY24 and FY25 , although the headroom would depend on the pace of capex for its transmission projects that are under construction, and cash upstreaming from its 74.9% subsidiary, Adani Electricity Mumbai Limited (AEML, senior secured rating: BBB-). We expect ATL to receive INR13.2 billion in cash from AEML in FY24 after compliance with the waterfall structure defined in the indenture of AEML’s bonds. We include investments in committed projects in our rating case and will reassess ATL’s business and financial profile upon any new acquisitions.

Fitch deconsolidates the EBITDA and debt of ATL’s restricted groups – the obligor group of AEML and another restricted group with seven transmission SPVs – to calculate ATL’s credit metrics. The cash outflow from the restricted groups follows the cash-flow waterfall mechanism as per the indenture of the borrowings. ATL’s EBITDA instead incorporates our expectation of the cash to be received from the restricted groups.

The Negative Outlook on ATL’s Long-Term Foreign-Currency Issuer Default Rating (IDR) reflects the Negative Outlook on India’s sovereign rating (BBB-/Negative). The rating is not directly constrained by the sovereign rating, but cannot exceed the Country Ceiling of ‘BBB-‘ to reflect the transfer and convertibility risk associated with foreign-currency obligations. The Country Ceiling may be revised down if the sovereign IDR is downgraded.