Fitch Ratings has affirmed Adani International Container Terminal Private Limited’s (AICTPL) USD300 million of senior secured partially amortising notes due 2031 at ‘BBB-‘. The Outlook is Stable.
RATING RATIONALE
AICTPL’s underlying credit profile is assessed as ‘bbb’ and the rating is capped by India’s (BBB-/Stable) Country Ceiling of ‘BBB-‘. The underlying credit profile reflects AICPTL’s strategic position in the primary port of call in north-west India, revenue stability of long-term cargo contracts and operational efficiency.
We regard the volatility of AICTPL’s revenue as low. AICTPL has a long-term terminal service agreement with Mediterranean Shipping Company S.A. (MSC), under which MSC is required to use AICTPL when its container ships call at Mundra Port, subject to AICTPL’s availability. AICTPL is 50%-owned by Terminal Investment Limited (TIL), which is majority owned by MSC and is the world’s sixth-largest container terminal operator.
It is in MSC’s interest as an indirect shareholder to reduce AICTPL’s volume volatility. The shipping line is also committed to use AICTPL’s facilities when possible, and the terminal will benefit from volumes via MSC’s vessel-sharing alliance with Maersk Line. We also believe the strong origin and destination (O&D) nature of AICTPL’s portfolio and the low revenue contribution from transhipment mitigate volume volatility.
However, this is weighed down by its customer concentration risk, limited operational track record, and a back-loaded amortisation profile.
Fitch’s assessment of Revenue Risk (Volume) was revised from ‘Midrange’ to ‘High Midrange’ under our new Transportation Infrastructure Rating Criteria, which assesses volume risk on a five-point scale with six sub-factors. AICTPL was assessed as ‘Stronger’ for reference market and strategic importance, and ‘Midrange’ for diversification, competition, demand volatility and relative cost to end users.
KEY RATING DRIVERS
Best-In-Class but Large Single Counterparty: Revenue Risk: Volume – High Midrange
AICTPL is India’s largest container terminal by container throughput and the gateway to landlocked north-western India. Its deep draft and 15 post-panamax quay cranes make it one of the port’s two terminals that can handle container ships of up to 18,000 twenty-foot equivalent units (TEU). Transhipment cargo contributed more than 40% of the terminal’s throughput in the past three years, but less than 25% of revenue.
MSC’s cargo contributes more than 70% of AICTPL’s throughput, but we believe the counterparty risk is mitigated by strong hinterland support due to AICTPL’s strategic location, comprehensive rail and road links, as well as state-of-the-art infrastructure. Should MSC’s credit profile deteriorate, or MSC stops routing its cargo to AICTPL’s terminal, other shipping lines are likely to fill the void because of capacity constraints at Mundra Port’s other terminals.
However, our volume risk assessment is moderated by customer concentration and volatile transhipment volume.
Limited Flexibility in Modifying Tariff: Revenue Risk: Price – Midrange
AICTPL is able to change its tariffs under a sub-concession with Adani Ports and Special Economic Zone Limited (APSEZ, BBB-/Negative, underlying: bbb). AICTPL’s long-term terminal service agreement with MSC sets a fixed price with annual tariff escalation and co-terminates with the APSEZ sub-concession agreement, which matures in 2031. However, the terminal service agreement does not incorporate take-or-pay or minimum guarantees, in line with the container terminal sector’s norms, which weighs on our price-risk assessment.
AICTPL also negotiates tariffs with other customers on a regular basis without take-or-pay or minimum guarantee throughput clauses.
Limited Capex Requirement: Infrastructure Development/Renewal – Stronger
AICTPL has been operating above the optimal port operating level of 70% or lower in the past two years. Nevertheless, management does not expect a material deterioration in operational efficiency, with other container terminals at Mundra Port also being close to or above their optimal utilisation levels. The company has also incurred capex to increase capacity by 13% in FY23, which should be sufficient to support their medium-term throughput forecast.
AICTPL’s best-in-class equipment and deep draft enables it to handle ultra-large vessels. The terminal requires limited maintenance capex for infrastructure, while dredging is carried out by APSEZ. Under the sub-concession agreement, APSEZ must maintain a minimum depth of 15.5m at the entrance channel and turning circle and 17.5m alongside the berth at no cost to AICTPL.
Robust Structural Protection: Debt Structure – Stronger
The USD300 million debt is a senior secured 10-year partially amortising note, with a 20.5% balloon repayment at maturity and back-loaded amortisation profile. Noteholders benefit from protective structural features to restrict distributions: 100% of cash will be trapped if the 12-month backward-looking debt service coverage ratio (DSCR) drops below 1.50x or if the project life cover ratio drops below 1.95x.
The notes also have a six-month debt service reserve account. Risk from 20.5% balloon repayment at maturity is mitigated by a senior debt restricted amortisation account that requires the issuer to sweep cash up to the outstanding debt service amount, including principal and interest, starting from three years prior to the maturity date.
The company relies on natural hedging to manage foreign-exchange risk. Nearly 90% of its revenue is in US dollars.
PEER GROUP
We view APSEZ as the most comparable to AICTPL among peers. APSEZ is India’s largest commercial port operator and benefits from a diverse portfolio. It is the concession holder for Mundra Port and one of AICTPL’s shareholders, while AICTPL operates one of the four terminals at Mundra Port. APSEZ also benefits from its long-term cargo contracts, which account for about 60% of total traffic. APSEZ has diverse customers, while AICTPL has significant exposure to indirect shareholder MSC and relatively volatile transhipment volume.
AICTPL, however, benefits from a strategic location at Mundra Port, state-of-the-art infrastructure, operational efficiency and an integrated logistics solution. AICTPL also has a stronger debt profile, protected with robust covenants and security versus APSEZ’s corporate-like debt with limited protective features. We therefore assessed their underlying credit profile as similar at ‘bbb’.
AICTPL is also comparable to JSW Infrastructure Limited (JSWIL, BB+/Stable). Similar to APSEZ, JSWIL is a large commercial port operator in India. It benefits from geographically diversified port locations along both the eastern and western coastlines of India. JSWIL is, however, rated two notches lower than AICTPL due to its concentrated exposure to cyclical commodities, corporate-like debt with limited protective features and weaker financial profile.
Port of Melbourne (issuing entity, Lonsdale Finance Pty Ltd: BBB/Stable) is the primary port of call serving the Victorian and broader Australian market, with limited competition. Its rating benefits from a diversified landlord port business model, long concession life, and low infrastructure development and renewal risk. It is comparable in operational scale to AICTPL and handled 3.2 million TEU in the financial year ended June 2022 (FY22).
However, AICTPL has a stronger debt profile due to its amortisation debt that is protected with robust covenants and security, compared with Port of Melbourne’s corporate-like debt structure with minimum protective features. Port of Melbourne also has relatively high net leverage and considerable refinancing risk. Nevertheless, its overall stronger qualitative attributes support higher leverage, resulting in the same underlying credit profile.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Average annual DSCR in Fitch’s rating case drops below 1.8x persistently on operational underperformance.
– A lowering of India’s Country Ceiling to ‘BB+’, from ‘BBB-‘.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– An upgrade of India’s Country Ceiling to ‘BBB’ with no deterioration in the underlying credit profile
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.
TRANSACTION SUMMARY
AICTPL, which issued the USD300 million secured notes directly, is a 50-50 joint venture between APSEZ and TIL. The joint venture is the developer and operator of a container terminal named CT3 as well as the CT3 extension at Mundra Port. The terminal is operated based on a sub-concession agreement between AICTPL and APSEZ that expires on 16 February 2031. This coincides with the term of the master concession agreement governing Mundra Port between APSEZ and the Gujarat Maritime Board.
AICTPL has also entered into an infrastructure facilities and port service agreement with APSEZ, under which APSEZ provides common infrastructure facilities and port services to AICTPL, with the tenor in line with the sub-concession agreement. The terminal has capacity of 3.1 million TEU and is able to handle large container ships of up to 18,000 TEU.
TIL is the world’s sixth-largest container terminal operator. It has an interest in more than 70 strategically located terminals (including upcoming projects) at key ports on major shipping routes in 31 countries across five continents. TIL was formed in 2000 to secure berths and terminal capacity for its majority shareholder MSC, the world’s largest container shipping line. APSEZ operates 12 ports across India. It is India’s largest private port operator, handling 312 million tonnes of cargo in FY22, which was about 31% of India’s seaborne cargo in FY22.
CREDIT UPDATE
AICTPL’s cargo throughput and revenue from port terminal operations grew by 11% and 13%, respectively, in FY22, driven by prolonged port congestion coupled with increased demand and global labour shortages at ports.
AICTPL’s transhipment cargo makes up about 50% of total container throughput, a slight increase from 45% in FY21. Overall transhipment revenue remains relatively low at 24%, despite an increased transhipment contribution in throughput, as transhipment handling charges are less than half of O&D handling charges. Management expects transhipment cargo share to remain at the current level in the medium term.
Its capacity utilisation was at 94% in FY22, compared with 85% in FY21. Management has shown confidence that this high utilisation has not resulted in any material degradation in operational efficiency.
Operating EBITDA margin has decreased by 2pp due to higher transhipment cargo as well as a slight increase in rail cargo revenue proportion. AICTPL pays about 28% of this revenue to APSEZ, as it uses railway infrastructure developed by APSEZ.
FINANCIAL ANALYSIS
Fitch’s base case largely adopts management’s forecast for operating costs, throughput growth that is capped at 80% of the utilisation rate for FY23 to FY31, and a 3% tariff increase. We exclude the terminal value from cash flow available for debt service to assess the amount from operations only. Fitch’s base case generates an average DSCR of 2.94x, with a minimum of 1.22x in 2031 and 2.41x in 2030, excluding 2031.
The base case generates a five-year average net debt/EBITDA of 2.1x, with a maximum of 2.6x.
Fitch’s rating case incorporates lower tariff growth of 2% a year and 10% operating expense stress, while throughput is capped at 70% of the utilisation rate for FY23 to FY31. Our rating case generates an average DSCR of 2.57x, with a minimum of 1.02x in FY31 and 2.05x in FY30, excluding FY31, which is the end of the concession and repayment period.
Repayment in FY31 is mitigated by a senior debt restricted amortisation account building up in the three years prior to the maturity date of the notes. AICTPL has to make payment into the account up to the outstanding debt service amount until the maturity date, including principal and interest. Fitch’s average DSCR excludes this account.
Fitch’s rating case generates a five-year average net debt/EBITDA of 2.3x, with a maximum of 2.9x.
SECURITY
– First ranking mortgage over immoveable property.
– First ranking charge on core assets and immoveable fixed assets.
– First ranking charge over all tangible and intangible moveable assets.
– First ranking charge over project accounts deed.
– First ranking charge over sub-concession and other project documents.
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
AICTPL’s rating is capped at India’s Country Ceiling.
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