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Fitch Assigns Adani Ports’ Proposed USD Notes ‘BBB-(EXP)’ Rating; Outlook Negative

Wednesday, 27 January 2021 | 01:00

Fitch Ratings has assigned India-based port operator Adani Ports and Special Economic Zone Limited’s (APSEZ, BBB-/Negative) proposed senior unsecured notes of up to USD500 million an expected rating of ‘BBB-(EXP)’ with a Negative Outlook. The proposed bond is ranked pari passu with the company’s existing US dollar bonds. The proceeds will be used primarily for refinancing the early redemption of APSEZ’s US dollar bond due 2022.

The final rating is contingent upon the receipt of final documents conforming to information already received.

RATING RATIONALE

The rating reflects APSEZ’s market leading position in India, the stability of long-term cargo revenue and its operational efficiency. The coronavirus pandemic may result in weaker domestic demand and exports, but cargo mobility is largely uninterrupted despite the global lockdowns.

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 lower in tandem. The Negative Outlook reflects the heightened probability that India’s Country Ceiling may be lowered, which would then constrain the ratings of APSEZ, which has an underlying credit assessment of ‘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 on 16 June 2020 at https://www.fitchratings.com/site/pr/10126330.

PEER GROUP

APSEZ benefits from cargo under long-term contracts, which accounts for about 60% of total traffic. PT Pelabuhan Indonesia II (Persero) (Pelindo II, BBB/Stable; underlying credit assessment: bbb), the largest container port operator in Indonesia, 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 five-year 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 46% of revenue in 2019. APSEZ benefits from long-term cargo but unlike ABP it does not own its ports on freehold. 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 in 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. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings.

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.

CREDIT UPDATE

APSEZ completed its acquisition of a 75% stake in Krishnapatnam Port Company Limited (KPCL) on 1 October 2020. The KPCL acquisition was primarily funded through a USD750 million bond issuance in July 2020.

APSEZ’s cargo volume rose by 7% in 2QFY21 from a year earlier, which did not include the cargo handled by KPCL as it was incorporated only from 1 October 2020.

APSEZ’s throughput growth normalised in FY20 after a sharp rebound of 15% in FY19. Throughput rose by 7% yoy in FY20, faster than the 4% for all Indian ports. The above-industry average growth reflects APSEZ’s expertise in turning around troubled assets and its operational efficiency. Throughput growth was mainly driven by Kattupali and new liquefied natural gas and liquefied petroleum gas terminals at Dhamra and Mundra. The company also continued to diversify its throughput from the west coast, with the east coast terminals of Dhamra, Kattupali and Ennore now accounting for 20% of total throughput, up from 15% a year earlier.

APSEZ’s revenue rebounded 9% yoy in FY20, driven by higher port revenue and a recovery in logistics revenue, partially offset by lower special economic zone revenue, which was due to timing differences in executing contracts.

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.

DATE OF RELEVANT COMMITTEE

03 July 2020

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

APSEZ’s underlying credit assessment of ‘bbb’ is capped by India’s Country Ceiling of ‘BBB-‘.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Source: Fitch Ratings

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