Adani Transmission 'BBB-' Rating Affirmed With Stable Outlook On Improving Financial Discipline; Off Watch Negative

  • ATL has restored its liquidity reserve account after receiving INR8 billion in an equity-like shareholder loan.
  • We expect the company's leverage, as measured by the FFO-to-debt ratio, to recover and remain at more than 15% over the next 12-24 months.
  • On April 9, 2019, S&P Global Ratings affirmed its 'BBB-' long-term issuer credit rating on ATL. We also affirmed our 'BBB-' long-term issue rating on the company's outstanding senior secured notes. We removed all ratings from CreditWatch, where they were placed with negative implications on March 5, 2019.
  • The stable outlook reflects our expectation that ATL will exercise financial discipline such that its leverage will be commensurate with an investment-grade rating on a sustainable basis.
SINGAPORE (S&P Global Ratings) April 9, 2019--S&P Global Ratings today took the rating actions listed above. We affirmed the rating because we expect Adani Transmission Ltd. (ATL) to restore its leverage following the replenishment of its liquidity reserve account (LRA). Moreover, we believe ATL will exercise financial discipline to sustain the leverage of the obligor group in line with an investment-grade rating. The obligor group consists of ATL stand-alone and four operational transmission lines, two each for the Mundra and Tiroda assets.
We estimate that ATL will maintain its ratio of funds from operations (FFO) to debt at more than 15% over the next 12-24 months. On April 5, 2019, the obligor group received an Indian rupee (INR) 8 billion unsecured perpetual loan from the sponsor, replenishing its LRA. We view the shareholder loan as an equity-like instrument, given that it can only be replaced with an equity-like instrument, its repayment can only occur after senior debt has been repaid, and it bears 0% interest. The company's leverage has been higher than we anticipated initially due to delays in receiving compensatory tariffs from regulators, and then management using obligor group cash to fund investments outside the obligor group.
Sound financial discipline is key for the rating, given that ATL's core transmission business is stable, with little operational risk. We had viewed ATL's use of the obligor group's cash to fund its purchase of Reliance Infrastructure Ltd.'s Mumbai assets in fiscal 2018 as a one-off event. However, we would revise our approach in assessing the obligor group on any further signs of a lack of financial discipline, which would indicate management's lack of commitment to maintaining an investment-grade rating. In our view, the recent replenishment of the LRA signals ATL's long-term commitment to an investment-grade rating, and reinforces our approach to assessing the obligor group.
We expect ATL to now exercise greater financial discipline to establish a track record of appropriate capital structure management on a sustainable basis. We anticipate the company will balance its use of cash for spending outside the obligor group and on dividends with maintaining appropriate leverage at the obligor group. ATL intends to ensure appropriate equity funding in advance for all future investments, rather than dipping into the LRA of the obligor group.
The stable outlook reflects our expectation of steady operating performance with stable tariff collections at the obligor group over the next 12-24 months. We also expect ATL to exercise greater financial discipline such that its FFO-to-debt ratio is above 15% on a sustainable basis.
We could lower the rating if ATL's financial position deteriorates again such that its FFO-to-debt ratio falls below 15%. This could happen if management again allows the cash from the obligor group to be used to fund investments outside the obligor group or pay sizable dividends, resulting in adjusted net debt above INR60 billion.
We could also lower the rating if we lower the sovereign credit rating on India.
An upgrade of ATL would be unlikely in the next 18-24 months. This is because the rating on the company is constrained by the sovereign credit rating on India.
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