Moody’s takes rating actions on 11 Indian infrastructure companies following sovereign downgrade
Moody’s Investors Service has today downgraded the following seven Indian infrastructure issuers by one notch:
1) NTPC Limited (NTPC)
2) NHPC Limited (NHPC)
3) National Highways Authority of India (NHAI)
4) Power Grid Corporation of India Limited (Power Grid)
5) Gail (India) Limited (GAIL)
6) Adani Green Energy Restricted Group (RG-2) comprising of Wardha Solar (Maharashtra) Private Limited, Kodangal Solar Park Private Limited and Adani Renewable Energy (Rj) Limited
7) Adani Transmission Restricted Group comprising (ATL RG): (1) Raipur-Rajnandgaon-Warora Transmission Limited (RRWTL), (2) Sipat Transmission Limited (STL), (3) Chhattisgarh-WR Transmission Limited (CWTL), (4) Hadoti Power Transmission Service Limited (HPTSL), (5) Barmer Power Transmission Service Limited (BPTSL), and (6) Thar Power Transmission Service Limited (TPSL)
At the same time, Moody’s has affirmed the baseline credit assessments (BCAs) for NTPC and NHPC at baa3, and downgraded the BCAs for Power Grid and GAIL by one notch to baa3 from baa2.
The outlook on all seven issuers remains negative.
Moody’s has also affirmed the ratings of the following four issuers and revised their outlooks to negative from stable:
1) Adani Ports and Special Economic Zone Limited (APSEZ)
2) Adani Transmission Limited (ATL)
3) Adani Electricity Mumbai Limited (AEML)
4) Azure Power Solar Energy Private Limited (Azure Power RG-2)
These rating actions follow Moody’s decision to downgrade India’s sovereign rating to Baa3 from Baa2 with a negative outlook, as announced on 1 June 2020. debt-issuing special purpose vehicles. The total number of downgraded Indian infrastructure companies stated above excludes the entities listed under Adani Green Energy Restricted Group and Adani Transmission Restricted Group.
Under Moody’s joint default analysis approach for government-related issuers (GRIs), government support is one of the key considerations in GRIs’ ratings. The ratings and BCAs of these five GRIs are very sensitive to a decline in the rating of their government owner given their close links with the Government of India. As a result, each GRI has been downgraded by one notch, consistent with the downgrade of the sovereign rating. The BCAs of Power Grid and GAIL have also been downgraded by one notch to baa3 for the same reason.
The negative outlooks for the five GRIs reflect the negative outlook on the sovereign rating.
Downgrade of Adani Green Energy restricted group
The downgrade of Adani Green Energy Restricted Group’s ratings reflects the group’s dependence on sovereign-owned entities, such as Solar Energy Corporation of India, for more than 70% of the offtake from its power projects. As a result, the ratings are constrained by the weakening credit profiles of the group’s off-takers.
The negative outlook reflects the negative outlook on the sovereign rating.
Downgrade of Adani Transmission restricted group
The downgrade of Adani Transmission Restricted Group’s ratings reflects the fact that all of the restricted group’s operations are based in India and thus its ratings are constrained by the sovereign rating.
The negative outlook reflects the negative outlook on the sovereign rating.
Affirmation of ratings and change in outlook for APSEZ, ATL, AEML And Azure Power RG-2
The affirmation of APSEZ’s issuer rating reflects its ability to withstand the temporary reduction in trade volume and revenue as a result of the coronavirus outbreak, taking into account the port’s moderate financial profile and robust liquidity position heading into fiscal 2021, as well as its ability to postpone capital expenditure.
The affirmation of ATL’s senior secured bond ratings reflects its predicable revenue profile that is underpinned by its portfolio of quality regulated and contracted assets, good operating track record and high financial leverage after taking into account its substantial capital expenditure program over the next 2-3 years.
The affirmation of AEML’s senior secured bond rating reflects the predictable revenues from its regulated utility business in Mumbai and its solid liquidity profile. It also reflects management’s commitment to maintaining appropriate financial metrics supportive of its credit profile through managing its capital spending over the current tariff control period.
The negative outlook on APSEZ, ATL and AEML’s Baa3 rating reflects (1) the fact that virtually all of their business operations are based in India, and (2) their ratings are constrained by the Baa3 rating and negative outlook on the sovereign.
The affirmation of the rating on Azure Power Solar Energy’s backed senior unsecured bonds considers the group’s long-term power purchase agreements with fixed tariffs and Moody’s expectation of support from Caisse de depot et placement du Quebec (CDPQ, Aaa stable), the largest shareholder of its parent, in the case of need.
The change in outlook reflects the weakening credit profile of the group’s government-related off-takers.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlooks, the ratings of all 11 infrastructure issuers are unlikely to be upgraded in near term.
However, Moody’s could upgrade the five GRIs’ ratings if the sovereign rating is upgraded and there is no material deterioration in the GRIs’ BCAs.
Similarly, Adani Green Energy Restricted Group and Adani Transmission Restricted Group’s ratings could be upgraded if the sovereign rating is upgraded and there is no material deterioration in their underlying credit profiles.
The ratings for APSEZ, AEML, ATL and Azure Power RG-2 could be upgraded (1) if the sovereign rating is upgraded; and (2) their standalone credit profiles improve significantly, with their financial metrics strengthening beyond their respective rating parameters.
The outlook for all 11 infrastructure issuers could change to stable from negative if the outlook on the sovereign rating changes to stable from negative.
Moody’s could downgrade the five GRIs if (1) the sovereign rating is downgraded or the government’s willingness to support them weakens; and/or (2) the GRIs’ BCAs weaken meaningfully, whereby their financial metrics fall short of their respective rating parameters.
Similarly, Moody’s could downgrade the notes issued by Adani Green Energy Restricted Group and Adani Transmission Restricted Group if (1) the sovereign rating is downgraded, or (2) their debt service coverage ratios deteriorate towards 1.30x and 1.35x respectively on a sustained basis.
APSEZ’s rating could be downgraded if the sovereign rating is downgraded or if cargo volumes decline, resulting in the company’s financial metrics deteriorating beyond the parameters of its Baa3 rating category. In particular, Moody’s would consider downgrading APSEZ if FFO/debt falls below 14% on a sustained basis and cash interest coverage below 2.75x-3.00x. A reinstatement of related-party loans could also strain the rating.
Moody’s could downgrade Azure Power RG-2’s ratings if the sovereign rating is downgraded or (1) the credit quality of its parent Azure Power Global Limited (APGL) deteriorates; (2) its FFO/debt falls towards 6% on a sustained basis; and/or (3) support from APGL’s shareholders weakens, as reflected by a meaningful decrease in CDPQ’s ownership.
Moody’s could downgrade ATL’s ratings if the sovereign rating is downgraded or if there is (1) a weakening in ATL’s financial profile as indicated by its FFO interest coverage ratio falling below 1.75x or its FFO/net debt staying below 7% on a sustained basis, (2) a deterioration in ATL’s business risk profile, or (3) a reinstatement of related-party loans.
Moody’s could downgrade AEML’s rating if the sovereign rating is downgraded or if there is (1) a weakening in AEML’s financial profile as indicated by its FFO/debt falling below 9% on a consistent basis, or (2) a delay in the repayment of its existing intercorporate loan or a reinstatement of related-party loans.