Fitch Rates ATL Stapled Pool Protected Structure SPVs First-Time ‘BBB-(EXP)’; Outlook Stable By Reuters


© Reuters. Fitch Rates ATL Stapled Pool Protected Structure SPVs First-Time ‘BBB-(EXP)’; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-September 11: Fitch Ratings has assigned expected ratings of ‘BBB-(EXP)’ to proposed debt from a stapled pool protected structure consisting of six issuing SPVs (and one non-issuing SPV) of Adani (NS:) Transmission Limited (ATL, BBB-/Stable). The Outlook on the ratings is Stable. Under the Note and Guarantee Agreement, each of the issuers within the common pool unconditionally guarantees the payment of principal and interest of each of the other issuers. The proposed debt securities are to be issued simultaneously, and comprise the following (with expected maturities up to 33 years): – Series A guaranteed senior secured notes issued by Sipat Transmission Limited (STL) – Series B guaranteed senior secured notes issued by Chhattisgarh WR Transmission Limited (CWRTL) – Series C guaranteed senior secured notes issued Raipur-Rajnandgaon-Warora Transmission Limited (RRWTL) – Series D guaranteed senior secured notes issued by Hadoti Power Transmission Service Limited (PPP-8) – Series E guaranteed senior secured notes issued by Barmer Power Transmission Service Limited (PPP-9) – Series F guaranteed senior secured notes issued by Thar Power Transmission Service Limited (PPP-10) The final ratings are contingent upon the receipt by Fitch of final documents conforming to information already received as well as the final pricing and financial close on the notes. KEY RATING DRIVERS The expected ratings reflect the project companies’ availability-based revenue under a supportive regulatory framework, with low technical complexity reflected in high availability levels and stable expected operating performance. Fitch projects consolidated debt service coverage ratios (DSCRs) to average 1.46x with a minimum of 1.31x under the Fitch Rating Case, and calculates a Realistic Outside Cost (ROC) multiple of 41x, which demonstrates the project companies’ strong resilience to cost increases. However, the rating is constrained by the project companies’ longer-term residual exposure to inflation given the mismatch between the operating and maintenance (O&M) cost escalation rates and the largely unindexed revenue base, which is reflected in a relatively weak inflation break-even of 6.4%. The PPP-8, PPP-9 and PPP-10 projects are also exposed to heightened payment delay risk associated with long-term transmission customers in the Indian state of Rajasthan, which could result in increased working capital requirements. The rating is capped at ‘BBB-‘ by the Country Ceiling of India (BBB-/Stable, Country Ceiling: BBB-). The underlying credit rating is ‘bbb’. High Availability, Unindexed Revenue: Revenue Risk – Midrange The seven transmission service providers (TSPs) in the asset pool receive stable and predictable, mostly unindexed, revenue streams for an initial period of 35 years for operating the transmission assets. The remuneration is based solely upon the availability of the assets and is therefore not exposed to volume or price risk. There is no direct bilateral counterparty as the payments are made by statutory bodies: – Central Transmission Utility for the three “Centre” assets, i.e. the national pool SPVs STL, CWRTL and RRWTL – Rajasthan state-owned distribution companies, which act as the State Transmission Utility (STU), for PPP-8, PPP-9 and PPP-10, and – Rajasthan STU for Adani Transmission (Rajasthan) Limited (ATRL). Clearly defined availability incentive mechanisms are in place. The TSPs may earn incentive payments if annual availability exceeds the target of 98%. However, unavailability penalties are uncapped and are not passed through to the operator. Incentive payments and deductions are made as part of a single monthly invoice to reflect performance in the preceding accounting year. To date, none of the SPVs have been subject to deductions due to very high availability during the limited operating history of the assets within each SPV. The group has a longer history of operating similar assets, which have demonstrated strong performance. The overall assessment is, however, constrained to “Midrange” because revenues are largely unindexed, leading to a material mismatch with related O&M costs and exposure a longer-term higher inflationary environment. Low Complexity, Experienced Operator: Cost Risk – Stronger Scope Risk – Stronger Operational risk is fairly well mitigated by the simple nature of works to operate and maintain transmission lines and associated substations. The geographical footprint of the portfolio is also contiguous with ATL’s existing operational asset base, allowing for optimisation of O&M costs by the same operator. There is only very limited lifecycle costs (LCC) expected throughout the tenor of the debt. Cost Predictability – Stronger The equipment and technology is widely used in transmission lines globally with documented performance. The sponsor has considerable experience in operating such assets in India through the affiliated company and O&M provider Adani Infrastructure Management Services Ltd (AIMSL), which operates more than 10,000 circuit kilometres. Moreover, there are plenty of experienced contractors available that may be substitutes and regulatory guidelines, although not applicable, provide costing benchmarks. Cost Volatility & Structural Protections – Midrange Cost escalation rates assumed by management are broadly in line with industry practice. However, revenues are unindexed, resulting in residual exposure to inflation. The O&M cost base indexation assumptions under the Fitch Cases are aligned with the Sponsor Case and assume a weighted-average escalation rate of 3.85%. We note that Fitch forecasts consumer price inflation at 3.8% by end-2020 and 4.1% by end-2021, with a GDP deflator of 3% to 2028, although CPI for India has been more volatile historically. Furthermore, there are no O&M reserves and the projects do not benefit from insurance protection for towers. Fully Amortising, Strong Features: Debt Structure – Stronger Fitch understands that ATL intends to refinance the debt associated with the SPV pool via a US private placement (USPP) issuance. The proposed USPP is senior ranking, fixed-rate and expected to fully amortise over a term of up to 33 years, with a minimum debt-free tail of 19 months. A six-month debt service reserve account (DSRA), six-month look-forward capex reserve account and lock-up provisions support the debt service. The debt is expected to be fully hedged against FX risk at issuance. Financial Profile Given the stapled pool protected structure, Fitch has analysed the SPVs on a consolidated basis. Fitch models its Rating Case assuming availability of 98%, in line with the availability recommended by the technical advisor, for which proper O&M procedures are required to be followed. In addition, Fitch applies a 5% stress to variable O&M costs and uses the same escalation rates as per the Sponsor Case as these are independently verified by an O&M consultant. This results in an average and minimum DSCR of 1.46x and 1.31x respectively for the Fitch Rating Case. Fitch calculates an ROC, which identifies the magnitude by which all costs could reasonably exceed initial projections and equates to the aggregate cost stress applied under the Fitch Rating Case. An ROC multiple assesses the projects’ financial cushion to absorb unexpected cost increases. The all-cost breakeven of 194% and ROC multiple of 41x demonstrates the projects’ strong resilience to cost increases. Furthermore, since the payment is not indexed to inflation on O&M costs, Fitch tested how much of an increase in inflation the project can tolerate before the minimum DSCR falls to 1.0x – i.e. the breakeven inflation increase. This resulted in a break-even inflation rate (i.e. weighted average cost escalation rate) of 6.4% with minimum DSCR reported in FY51, highlighting vulnerability towards the backend of the debt tenor under a long-term high inflationary environment. PEER GROUP There are no local transactions rated by Fitch that are comparable to the ATL pool SPVs. Fitch has rated a number of onshore availability-based transmission lines in Brazil, but these ratings are assigned on the National Scale and are less relevant compared with those in other jurisdictions. Nevertheless, the systemic risk of the ATL pool SPVs, particularly the Centre assets, is similar with that of the sector in Brazil. The legal and regulatory framework of the Brazilian power sector associated with the public-service nature of the power generation, transmission and distribution segments, its essentiality and the high level of off-taker diversification supports the characterisation of off-take risk as a systemic one, resulting in the Revenue Risk consistent with a ‘Stronger’ attribute. Although the Indian system shares a large number of these attributes, the implementation of Tariff-Based Competitive Bidding (TBCB) for the ATL pool SPVs introduces additional revenue risks, including unindexed tariffs and some payment delay exposure. As such, we view Revenue Risk for the ATL pool SPVs as “Midrange” in comparison. Peers rated on the international scale include ABY Transmision Sur, S.A. (ABYTS) in Peru and a privately rated US project (both rated BBB+/Stable). ABYTS’s rating is capped by that of the Peruvian sovereign. The ATL pool SPVs exhibit slightly higher Rating Case metrics (although the US peer has a greater availability stress) and broadly similar ROC multiples to both projects. Although ABYTS also has a ‘Midrange’ revenue risk assessment; the revenue risk exposure for the ATL pool SPVs reflects weaker features, such as exposure to unlimited penalty deductions and a material mismatch between O&M costs and the revenue stream. We note that the US peer is not exposed to payment deductions and costs are passed through. Another peer of interest is Celeo Redes Operacion Chile S.A. (BBB-/Stable), a 30-year availability payment transaction comprising three transmission lines. Celeo’s Rating Case average DSCR of 1.21x is weaker than the ATL pool SPV’s 1.46x. Both projects have ‘Midrange’ assessments for revenue risk, although Celeo’s revenue profile is not exposed to a material mismatch with related-cost indexation. Celeo also has a ‘Stronger’ Cost Risk profile, while the ATL pool SPV’s debt structure is stronger than Celeo’s. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: -Downgrade of the Country Ceiling of India -The underlying credit rating could be lowered to ‘bbb-‘ if average and/or minimum DSCR is consistently below 1.30x as a result of high levels of availability deductions, material and persistent increases in operating costs, payment delays and / or adverse regulatory decisions. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: -Upgrade of the Country Ceiling of India provided that there is no deterioration in the underlying credit rating of the consolidated project companies -The underlying credit rating is unlikely to be upgraded given the cost indexation mismatch and structural payment delay exposure that weigh on the revenue risk profile TRANSACTION SUMMARY The transaction is a simultaneous issuance of six series (A, B, C, D, E and F) of guaranteed senior secured pari-passu notes of approximately USD400 million. The proceeds are expected to be used to refinance the existing debt of the project companies. Under the Note and Guarantee Agreement, each of the issuers within the common pool unconditionally guarantees the payment of principal and interest of each of the other issuers. We have therefore analysed the consolidated profile of the stapled pool protected structure. Fitch Cases The key assumptions underpinning Fitch’s base and rating cases refer to operating and capital costs, project availability and cost indexation. As detailed in Fitch’s criteria, the Rating Case incorporates a combination of operational and economic stresses that simulates a scenario of material underperformance, with the stresses based on Fitch’s experience, peer comparison, and the opinions expressed by an independent engineer (IE). Fitch took into consideration reviews prepared by Desein Private Limited (O&M consultant) and Lahmeyer International (India) Pvt. Ltd (technical advisor). Asset Description ATL houses the Adani Group’s electricity transmission, distribution and supply businesses. It operates in nine states in India with operational and under-construction transmission capacity of 10,938 ckms/15,205 MVA (excluding Mumbai Transmission) and 2,084 ckms/1,950 MVA, respectively. ATL plans to refinance the bank debt of seven SPVs: STL, CWRTL, RRWTL, PPP-8, PPP-9, PPP-10 and ATRL. The debt will be refinanced via issuance of USPP debt using a stapled structure. The SPVs under the USPP offering are a mix of assets governed by India’s Central Electricity Regulatory Commission (CERC) and State Electricity Regulatory Commission (SERC) that are located in the states of Maharashtra, Rajasthan, Madhya Pradesh and Chhattisgarh. ATL has existing operations in Maharashtra, Gujarat, Rajasthan and Haryana (i.e. in the northern and western regions of India). As of August 2019, all projects have achieved their legal commercial operation date (COD). In total, there are 29 transmission lines and 18 substations across the seven SPVs within the asset pool. Contact: Primary Analyst James Hodges Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Level 15, 77 King Street Sydney NSW 2000 Secondary Analyst Louis Pang Senior Analyst +852 2263 9992 Committee Chairperson Sajal Kishore Senior Director +65 6796 7095 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com; Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Availability-Based Rating Criteria (pub. 06 Jun 2019) https://www.fitchratings.com/site/re/10076143 Rating Criteria for Infrastructure and Project Finance (pub. 27 Jul 2018) https://www.fitchratings.com/site/re/10038532 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10088746 Solicitation Status https://www.fitchratings.com/site/pr/10088746#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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