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Fitch Assigns Adani Ports’ USD750 Million Notes ‘BBB-‘ Final Rating; Outlook Negative

Fitch Ratings has assigned India-based port operator Adani Ports and Special Economic Zone Limited’s (APSEZ, BBB-/Negative) USD750 million senior unsecured notes due 2027 a final rating of ‘BBB-‘ with a Negative Outlook. The proceeds will be used primarily for refinancing the debt of Krishnapatnam Port Company Limited (KPCL) upon the completion of APSEZ’s acquisition of the company. The new issue is ranked pari passu with APSEZ’s existing US dollar senior unsecured notes.

The final rating follows the receipt of documents conforming to information already received and is in line with the expected rating assigned on 12 July 2020.

RATING RATIONALE

APSEZ announced its acquisition of a 75% stake in KPCL in January 2020, which will be fully funded through internal accruals and existing cash balances. APSEZ will consolidate KPCL’s debt of INR62 billion into its balance sheet and incur INR55 billion in cash outflow to fund the acquisition, which will not affect APSEZ’s rating, in our view.

The Competition Commission of India on 23 July 2020 approved APSEZ’s acquisition of KPCL. APSEZ is in the process of obtaining other regulatory approvals including from the Andhra Pradesh state government. We have not included the acquisition or EBITDA contribution from KPCL in our forecast due to the pending regulatory approvals. However, the increased debt as a result of the bond issuance will not have a material impact on the credit profile of APSEZ as additional indebtedness is largely offset by an increase in its cash balance. If the acquisition does not proceed, APSEZ could use the cash balance to fund its other capex, investment or refinance its other upcoming debt maturities.

APSEZ’s ratings are constrained by the sovereign’s Country Ceiling. Should India’s ‘BBB-‘ Long-Term Foreign-Currency Issuer Default Rating (IDR) be downgraded, the ‘BBB-‘ Country Ceiling may also be revised down in tandem. The Negative Outlook reflects the heightened probability that India’s Country Ceiling could be lowered – which would then constrain APSEZ’s ratings. APSEZ’s underlying rating is ‘bbb’.

KEY RATING DRIVERS

Risk Assessment: Fitch assesses APSEZ’s revenue risk (volume) as ‘Stronger’, revenue risk (price) as ‘Midrange’, infrastructure development and renewal as ‘Stronger’ and debt structure as ‘Midrange’. For more information, see the last full review published 16 June 2020 at https://www.fitchratings.com/site/pr/10126330.

PEER GROUP

PT Pelabuhan Indonesia II (Persero) (Pelindo II, BBB/Stable; underlying credit rating: bbb) is the largest container port operator in Indonesia. APSEZ benefits from cargo under long-term contracts, which accounts for about 60% of total traffic. On the other hand, Pelindo II benefits from stable rental income from joint ventures, which accounts for about 60% of its EBITDA. We forecast average leverage of 3.2x during the forecast period for APSEZ under our rating case, a level similar to that of Pelindo II.

ABP Finance Plc (A-/Stable) is the financing vehicle of Associated British Ports (ABP), which operates 21 ports in the UK. ABP benefits from its perpetual ownership of port assets and its landlord-tenant business model, with long-term take-or-pay contracts representing around 45% of revenue in 2018. APSEZ benefits from long-term cargo but does not own on freehold its ports like ABP. ABP’s leverage is higher than that of APSEZ, although ABP’s debt includes extensive financial covenants, securities and other creditor-protective features.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

– We do not expect positive rating action in the near term

– A revision in the Indian sovereign’s Outlook to Stable would indicate that the Country Ceiling is likely to remain at ‘BBB-‘ and therefore our Outlook on APSEZ would also be revised to Stable

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Prolonged deterioration of Fitch’s rating case adjusted net debt/EBITDAR to above 5.0x due to underperformance or a material reduction of average concession life

– Lowering of India’s Country Ceiling to ‘BB+’

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

TRANSACTION SUMMARY

APSEZ accounted for approximately 17% of India’s seaborne cargo in the financial year ended March 2020 (FY20). It operates a string of 10 ports across India. Its most important port, Mundra Port, contributed 62% of the group’s throughput and serves as the gateway to landlocked north-western India.

FINANCIAL ANALYSIS

The Fitch base case assumes a 6% throughput decline in FY21 and an 11% rebound in FY22, in line with management’s forecast. We assume throughput will rise by 6.7% per annum thereafter, in line with the CAGR of Indian GDP in the past five years. It implies a throughput CAGR of about 5% between FY20 and FY25. We have incorporated management’s expectation of a delay in some capex in FY21. Our base case assumes INR123 billion in capex in FY21-FY25, of which INR23 billion will be spent in FY21. We also assume dividend payouts will be 20% of profit after tax (PAT) in FY21 and 25% thereafter. Our base case generates an average adjusted net debt/EBITDAR of 2.5x with a maximum of 3.2x.

Fitch’s rating case assumes a 10% throughput decline in FY21, followed by a 10% recovery in FY22. We have applied a 10% haircut to the base case’s throughput growth assumption thereafter. It implies a throughput CAGR of about 3% between FY20 and FY25. We also applied 10% stress to our base-case capex assumption. We assume dividend payouts will be 20% of PAT in FY21 and 25% afterwards. Our rating case generates an average adjusted net debt/EBITDAR of 3.2x with a maximum of 3.6x.
Source: Fitch Ratings

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