By Divya Charen C

India Ratings and Research (Ind-Ra) has taken the following rating actions on Adani Transmission Limited’s (ATL) debt facilities:

  • INR35.8bn non-convertible debentures (NCDs): affirmed at ‘IND AA+’/Stable
  • INR12bn commercial paper (reduced from INR15bn; outstanding INR9.25bn): affirmed at ‘IND A1+’
  • INR20.5bn senior term loan: ‘IND AA+’/Stable; rating withdrawn as the facilities have been paid in full
  • INR13.7bn long-term debt: ‘Provisional IND AA+’ rating with a Stable Outlook; rating withdrawn as the company is no longer proceeding with the instrument as envisaged

Debt at ATL is rated based on the project finance approach because Ind-Ra expects its debt levels and repayments to be in line with revenue from the operating assets of the 
two operating step-down subsidiaries  - Adani Transmission India Limited (ATIL) and Maharashtra Eastern Grid Power Transmission Company Limited (MEGPTCL). ATIL and MEGPTCL are free of any debt, apart from loans from ATL. Though ATL develops new projects through its other subsidiaries, the waterfall mechanism among ATL, ATIL and MEGPTCL for the rated debt ensures that cash flows are first available for servicing the rated debt before being invested in new projects or for any other purpose, after complying with the defined financial covenants. 


PROJECT PROFILE 

ATL is a holding company, created to house the transmission assets of Adani group. ATL holds ATIL and MEGPTCL. ATIL holds three transmission assets, which are 400kV Mundra-Dehgam line, around 500KV Mundra-Mohindergarh-Bhiwani line, and 400kV Tiroda-Warora line. MEGPTCL holds 765kV Tiroda-Aurangabad transmission asset and 765/400kV sub-stations. ATIL and MEGPTCL together reported revenue of INR21.1bn for FY16 (FY15: INR13.8bn) and EBITDA of INR19.3bn (INR12.7bn). 


KEY RATING DRIVERS

Strong Financial Performance: ATL‘s revenue and EBITDA in FY16 were in line with Ind-Ra’s expectations. Receivable days for ATIL and MEGPTCL were 54 and 10, respectively, for FY16. Also, ATL raised INR5bn masala bonds and USD500m dollar bonds (INR33.5bn) and used the proceeds to refinance the entire debt in ATIL and MEGPTCL, reduce the commercial paper exposure to INR9.25bn from INR15bn, and to repay part of the promoter debt. 

Stable Revenue Potential
: ATL's revenue is in the form of interest payments, principal repayments and dividends from ATIL and MEGPTCL. The transmission assets have demonstrated stable revenue generation ability, based on them meeting the regulatory availability requirement and underpinned by the pre-defined regulatory process of determining tariff on a multi-year basis. 

For the control period started from FY17, Maharashtra Electricity Regulatory Commission has issued multi-year tariff orders for Tiroda-Warora and Tiroda-Aurangabad transmission assets. Part of capital cost has been provisionally disallowed for MEGPTCL, pending approval of the final project cost. The commission has approved recovery of tariff arrears for Tiroda-Aurangabad transmission assets. The final tariff order for Mundra-Dehgam and Mundra-Mohindergarh lines has been approved by Central Electricity Regulatory Commission that allows 96.5% of the capital cost which has been claimed by the operator. 

Minimal Regulatory Risk
: The projects are modelled on a cost-plus, regulated return on equity basis, thereby providing reasonably clear revenue visibility. The model protects the economic rationale of the projects with a pre-defined and regulated post-tax return on equity of 15.5%. The repayment structure proposed for the debt broadly reflects the depreciation allowed as part of tariffs and thus avoids any major mismatches in cash flows.  

Expansion-related Risk
: ATL won four interstate and one intrastate transmission projects through competitive bidding. These projects are housed in SPVs. The management has confirmed that financing for the three SPVs will be raised at respective SPV levels on project financing principles. In addition, ATL is acquiring two operating intrastate transmission assets from GMR Energy Limited and these assets could be housed under ATL as subsidiaries. Any explicit or implicit commitments, contingent liabilities or guarantees including sponsor support undertakings in relation to its investments that jeopardise the seniority of the rated debt could result in a rating downgrade. Balance equity requirement for the new projects is estimated at INR7bn, to be infused in FY17-FY20. The estimated surplus cash flows from ATIL and MEGPTCL would be more than sufficient for meeting the same. 

Counterparty Risk
: Around 35% of revenue pertains to Mundra-Mohindergarh and Mundra-Degham assets for which the revenue collection would be through the point of connection mechanism coordinated by Power Grid Corporation of India Limited and disbursement would be according to the revenue sharing mechanism. 

For the remaining revenue from intrastate transmission assets in Maharashtra, the state transmission utility is responsible for collecting and disbursing transmission charges. Revenue sharing mechanism within the state does not carry a significant advantage due to limited diversity among counterparties. As the transmission assets are critical for power generation and supply, the recovery of transmission charges is considered to have minimal uncertainty. Though the processes established for recovering tariff provide comfort, the significant concentration of revenue from distribution utilities in Maharashtra remains a constraining factor.

Low Operating Risk
: The transmission assets under ATIL and MEGPTCL have achieved average monthly availability of above 99.5% since commissioning, thus consistently achieving the availability targets to recover the entire tariff. Operating risks are minimal given that the transmission technology and equipment have been in use in the country for decades. 

Debt Structure
: ATL has raised INR74.3bn of long-term fixed-coupon debt, consisting of INR35.8bn rupee NCDs, USD500m dollar bonds (INR33.5bn) and INR5bn masala bonds. These loans carry a negative lien on the SPVs' fixed assets and transmission licenses. Escrow accounts have been set up in ATL, ATIL and MEGPTCL, such that the entire project revenue from ATIL and MEGPTCL is available to ATL for debt servicing. 

Maturity of USD500m dollar bonds falls in FY27, while maturities of INR35.8bn rupee NCDs and INR5bn masala bonds fall during FY18-FY22. Terms of dollar bonds stipulate hedging at least 95% of principal for the entire tenor of the bonds. According to ATL, annual coupon for dollar bonds due in forthcoming year is hedged and subsequent coupon payments would be hedged as required. Ind-Ra did not factor in foreign currency risk at the time of assigning the provisional rating, since no foreign currency debt was envisaged then. Though the cash flows are resilient to rupee depreciation to some extent, Ind-Ra would monitor for highly adverse currency movements, which would affect the rating, if the entire dollar bond coupon payments remain unhedged. In FY17, the sum of debt and any contingent liabilities or guarantees exceeding INR85bn could affect the rating. Also, the terms of debt include a compulsory reduction of debt by INR4bn/year from FY17. Financial covenants including debt service coverage ratio, fixed asset coverage ratio, net debt to net worth ratio and net debt to EBITDA ratio would be monitored under the financing agreements. 

Terms of debt require a coupon service reserve equivalent to the entire coupon payment, to be created three months before the coupon is due. 

Refinancing Risk
: Given the long economic life of the assets and the regulatory recovery of interest and principal (through an allowance for depreciation), the agency considers that the refinancing risk is reasonably mitigated. Requirement for refinancing will arise during FY20-FY22 and in FY27. ATL expects to reduce the debt in line with asset depreciation. The agency has assumed in its base case, amortisation of about 58% of the long-term debt by FY26 with average annual debt amortisation of 5%-6%. 

The debt structure carries an interest rate risk at the time of refinancing. The stress cases indicate that the cash flow, in general, has the flexibility to accommodate medium-to-long term maturity tenors on the refinanced debt. 

Strong Coverage Metrics
: Ind-Ra's financial analysis on revenue of the transmission assets, after considering the impact of recent tariff orders, indicates strong debt service coverage metrics, required for the regulated assets. Ind-Ra’s analysis also considers a working capital facility of INR8bn, likely to be raised at ATL, ATIL and MEGPTCL levels. 


RATING SENSITIVITIES

One or more of the following events could lead to a negative rating action: 
- any adverse regulatory action materially affecting the cash flow
- high concentration of refinancing risk in any particular year and the debt amortisation pattern significantly deviating from the regulatory depreciation and interest schedule
- any significant deterioration in the coverages and other metrics below the agency's base case, breach in covenants or the defined structure



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. 

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Analyst Names

  • Primary Analyst

    Divya Charen C

    Senior Analyst
    India Ratings and Research Pvt Ltd 4th Floor, D South, TIDEL Park No 4, Rajiv Gandhi Salai, Taramani Chennai 600 113
    +91 44 43401710

    Committee Chairperson

    Venkataraman Rajaraman

    Senior Director and Head Infrastructure and Project Finance
    +91 44 43401702

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121