Many important questions about the Adani Group will be answered in the coming months. Investors seek clarity on the credit impact of a string of allegations against the group in a short-seller report published in late January, and on the findings of a recently launched Supreme Court investigation.

In early February we revised to negative the rating outlook on two Adani Group entities, to reflect the governance risks and funding challenges of the wider group. We also affirmed the 'BBB-' ratings on Adani Electricity Mumbai Ltd. (Adani Electricity) and Adani Ports and Special Economic Zone Ltd. (Adani Ports).

The ratings of the project financing transactions are currently unchanged, as their ring-fenced structure and the availability of security packages and cash-flow waterfalls mitigate wider Adani Group-related risks.

Investors want to understand the reasons for our rating action, and the watchpoints and timeline for the negative outlook. They broadly want insight into the funding and governance risks that will determine whether these entities remain investment grade or become fallen angels.

Frequently Asked Questions

Which entities do we rate under the Adani umbrella?

We rate two corporates and four project finance entities within the Adani Group. However, we do not rate several group entities; including some with outstanding dollar bonds.

Chart 1

What will be the next steps, watchpoints, and likely timeline for rating action?

The key will be additional information regarding Adani Group's governance and funding, across rated and unrated companies. Although rating outlooks typically span 12-24 months, ratings or outlooks may change faster than this timeframe should we perceive a change in creditworthiness.

Downside risks could stem not just from restricted access to funding, but also from our broader view on the quality of the group's governance. For example, we are likely to take a negative rating action should any investigation uncover serious wrongdoing. This may include previously undisclosed material related-party loans, cash leakage, or misreporting.

Conversely, to revise the outlook on Adani Electricity and Adani Ports to stable, we will need to be convinced that governance practices in the group and funding access will improve in line with an investment-grade credit profile.

Key watchpoints are:

Governance

• Conclusions of a Supreme Court of India appointed independent panel of experts (comprising industry luminaries) that are investigating potential regulatory shortcomings in the oversight and disclosures of Adani Group.
• The court has directed the capital markets regulator, Securities and Exchange Board of India, to submit its findings to the panel in two months, reflecting the court's wish to quickly decide on the issue. However, reports on such matters can often be delayed.
• If the investigation proves illegal activities by the group or points to serious wrongdoing, we could revise our assessment of management and governance down to weak from fair. This could result in a downgrade, potentially of more than one notch, depending on the effect of such activities on the credit profile.
• Any significant adverse audit observations, qualified audit opinions for the year ending March 31, 2023, or significant reporting and disclosure weakness identified by any company-appointed independent external reviewers.

Funding

• Adani Group aims to refinance a US$4.5 billion bridge loan by the end of 2023, according to media reports. The group used the loan to buy Ambuja Cements Ltd. and ACC Ltd.
• The terms of any longer-term loan to refinance the acquisition loan would signal the funding appetite of domestic and international banks to lend against cash flows from operating entities.

In addition, also under the umbrella of funding, are the refinancing plans for:

• A US$650 million debt due in July 2024 for Adani Ports.
• Adani Green Energy Ltd. which has an unrated US$750 million bond due in September 2024
• A Parampujya Solar Energy Private Ltd. Restricted Group (PSEPL RG) bond maturing in December 2024. Its hedging arrangements expire in June 2024. A failure to put in place a credible refinancing plan at least 12 months in advance could trigger a negative rating action.
• While Adani Green Energy Ltd. Restricted Group 2 (AGEL RG2) doesn't face refinancing risk on the bonds due in 2039, it will need to roll over the hedge on the bonds; the hedge expires in October 2024.

We will also review the group's ability to raise equity and debt, both via private placement or through public debt markets. Adani Group has raised US$1.9 billion in equity from GQG Partners Inc., and some media reports suggest the group has access to a US$3 billion credit line. The detailed terms and conditions of any such funding are undisclosed.

We understand that some of these funds have been used to fully repay all share backed financing, totaling to US$2.15 billion. Any fresh share backed loans raised by promoters could pose funding risks for the larger Adani Group and rated entities.

Similarly, its relationship with domestic and international banks will be critical to meeting the group's funding needs. Security and repayments terms will affect the group's financial flexibility.

Management may review growth plans, capital expenditure (capex), leverage tolerance, and financial policies for group entities. For instance, the group announced lower leverage targets for Adani Ports.

Governance-Related Risks

Do we directly factor in risk from the larger Adani Group into our ratings on Adani Group entities?

Adani Group does not have an incorporated overarching holding company structure. Our corporate methodology does not directly link corporate ratings to the creditworthiness of family-owned businesses or the individuals and trusts that hold the promoters' interests in Adani Group companies.

Assessing the group's creditworthiness, leverage, and liquidity position is difficult given our reliance on public information for unrated listed entities. We also rely on limited public disclosures of unlisted, private entities, and of funding or liabilities at the promoter level.

For instance, the group did not separately disclose the aggregate amount of loans raised by promoters against share-backed financing before the recent repayment of the facilities. Given this limited transparency, it may not be possible to completely ascertain the risk profile of the promoter companies.

The promoters' need to raise external funds on short notice speaks to potential liquidity strain on the group. The inability of the promoter group to raise such funds would likely have hit market sentiment for the rated group companies.

How may governance issues at the shareholder level affect operating entities?

If allegations of illegal activities or misconduct at the shareholder level prove true, we would have a more negative view of the governance of group entities. This is because the ownership of most Adani Group entities is held by the same promoters, related-family entities, and trusts.

The presence of Adani family members among the group's boards of directors and senior management (including CEOs) gives them further influence on decision making. The promoters and senior management significantly influence the business strategy, growth plans, financial policies, reporting, and disclosures of operating entities. Different group companies share some of the same managers among the treasury, finance, and technical divisions.

We already assess governance as a relative weakness in our rating analysis of Adani Group entities due to significant promoter control, frequent related-party transactions, lack of transparency of the credit position of the promoter-held entities, and aggressive growth appetite.

The complex nature of the group relationships does partly factor into our governance assessment of all rated group companies as a 'G-3'. This means that governance has a moderately negative effect on the ratings on these entities.

Are there related-party transactions in the normal course of the group's business?

Adani Group companies have significant recurring transactions with related parties in regular business. Examples include Adani Ports' provision of ports services on a chargeable basis to Adani Enterprises Ltd., and Adani Electricity's fuel procurement from Adani Green Energy based on public tender.

We rely on well-established independent auditors to review terms for such transactions, confirm they are in line with market practice, and are disclosed as related-party transactions. However, in some cases the audit of the rated entity relies on audits of subsidiaries, which are performed by accounting firms other than the main auditor.

For instance, the audits of subsidiaries generating nearly half of the revenue for Adani Ports, and 15% of Adani Electricity's, are not conducted by the main auditor. The quality of these outside audit firm may vary, and this along with oversight by main auditor can affect the quality of the reviews.

The short-seller report has alleged some other entities are related to the Adani Group, without disclosure as such. We have relied upon Adani Group's formal response to the National Stock Exchange of India that these transactions are not between related parties, and follow Indian reporting requirements.

However, if these allegations prove true, it will indicate greater deficiencies in the governance and disclosure for the group.

Certain other transactions occur occasionally. In such cases, we rely on additional information from management, external reviews, or on reports from independent experts.

Adani Electricity's acquisition of land to build a substation in Mumbai is an example. The firm paid a capital advance of Indian rupee (INR) 5.15 billion to Superheights Infraspace Private Ltd., a real estate firm related to Adani Group.

By our understanding, the capital advance was provided only after obtaining in-principle approval from Maharashtra Electricity Regulatory Commission, the regulator for Adani Electricity's license area. The valuation for the land parcel was also conducted at arm's length with independent parties involved, according to the company.

Are there unusual material transactions with potential credit exposure?

Some transactions by Adani Ports expose it to counterparty credit risks, such as providing loans and inter-corporate deposits (ICDs) to external entities. This can expose the company to potential payment defaults and delays. Adani Ports' capacity to continuously monitor the credit health of these counterparties is untested.

For example, in fiscal 2022 (year ending March 31), Adani Ports provided loans and ICDs to suppliers or vendors of INR407 billion. This was an unusually large sum even when compared with Adani Ports' total revenues that year, of INR171 billion.

A failure to wind down such transactions to limit Adani Ports' exposure to such activities could result in negative rating pressure. There have been no payment defaults on these transactions, by our understanding. The firm received INR411 billion back from suppliers and vendors.

The company is also exposed to the credit risks of a related party, Adani Properties Private Ltd. in the event of payment defaults. Adani Properties is the guarantor for INR13.2 billion of such loans and ICDs.

Why are related-party transactions outside the normal course of business a downgrade trigger for Adani Ports?

Our credit assessment of Adani Ports is based on its stand-alone business and financial standing. Such transactions could lead to cash leakage or expose the rated entity to the group.

Significant transactions with loans and advances from the promoter group could also expose the rated entities to the funding situation of promoter entities. We note that the bond documents for rated Adani companies such as Adani Electricity and Adani Ports identify the brother Vinod S. Adani as part of Adani Group. As per our understanding, any transactions with the brother and entities where he is a beneficiary should be disclosed as related-party transactions.

We have reviewed the company's filings with the stock exchange in India for the period April 2022 to September 2022 for the two companies and we haven't come across any such reported transactions. However, currently we have no information after September 2022 to verify the same. We expect further details to be available along with audited full-year accounts.

The promoters and their trusts own Adani Ports in their individual capacity. We therefore cannot assess their credit quality under our Corporate and Group Rating Methodology.

Further, Adani Ports doesn't enjoy structural and covenant protections. As a result, we may lower the rating if Adani Ports increases related-party loans or advances outside the normal course of business, such that it is exposed to the credit quality of the Adani Group or other entities.

For example, for fiscal 2022, we added INR29.5 billion to our debt calculations for Adani Ports for corporate guarantees against credit facilities used by the joint-venture entities of Adani Ports.

If Adani Electricity extends loans to disclosed related parties out of its distributable surplus, would this be outside the normal course of business and, therefore, hit our rating?

No. Any payments out of distributable surplus are the company's prerogative. There is no restriction on the utilization of funds from the distributable surplus, in terms of our ratings assessment. Any amount that can be distributed would be used as dividend payouts following an application of the cash flow waterfall, in our view.

Adani Electricity in fiscal 2020 extended loans of INR10.4 billion to Adani Properties, a related party. Adani Electricity funded the loans using its distributable surplus. We do not factor in the repayment of such loans in our assumptions until they are received in full. As such, they don't affect our forecasts. We will give credit to these funds only when received by Adani Electricity and if not kept in distributions accounts.

However, if the company undertook related-party transactions that are not conducted at arm's length, other than from the distribution account as per its project-finance-like cash flow waterfall, this would have a negative rating effect.

Does the presence of other significant minority shareholders in certain entities mitigate governance risks?

Partly. The rights of minority financial investors vary, and therefore so does their effectiveness. But it still provides independent oversight, especially when coupled with board seats. For instance, the presence of the Qatar Investment Authority as a 25.1% minority shareholder in Adani Electricity helps mitigate some of the governance risks for Adani Electricity.

The external role is likely stronger for the project finance structure of Adani International Container Terminal Pte. Ltd. (AICTPL), which is a 50:50 joint venture between Adani Ports and Terminal Investment Ltd. Holdings S.A. The majority owner of Terminal Investment, Mediterranean Shipping Co. SA, is the largest shipping line in the world. It accounts for over three-quarters of the cargo volume at the terminal.

Funding And Liquidity Risks

What are the refinancing requirements for the rated corporate entities, Adani Ports and Adani Electricity?

The lack of lumpy debt maturities in 2023 and staggered debt maturities over the next few years reduce the immediate liquidity and refinancing risks for the entities we rate. Based on information provided by management, no Adani Group firm we rate has material refinancing needs in 2023.

All appear to have adequate available funds to meet their near-term debt maturities. In addition, Adani Ports and Adani Electricity will likely generate healthy operating cash flows and maintain flexibility in adjusting capex, based on funding availability.

Chart 2

What is our view on rated Adani Group corporate and project entities' access to dollar-bond markets?

Current difficult market conditions and the sharp rise in U.S. interest rates have already severely limited issuance of U.S. dollar debt for all Indian companies, including Adani Group.

Investor concerns about allegations from the short-seller report and on the broader group's governance and transparency may also hit entities' near-term access to the dollar-bond market.

Widening bond yields could also make refinancing costlier for Adani Group entities since the short-seller report was published (see chart 3).

Chart 3

Rated Adani Group entities significantly rely on dollar bonds. Access to dollar markets, and the cost of this funding, is important for them (see chart 4).

Chart 4

The group's foreign-currency bond maturity profile is generally spread out with no maturities in 2023. This reduces the immediate liquidity and refinancing risks. However, there are upcoming maturities in 2024 and 2025 that the group will need to manage, including maturing bonds at rated entities such as Adani Ports, PSEPL RG, North Queensland Export Terminal Pty Ltd. (NQXT), and AGEL Holdco.

Chart 5

Will there be any change in the support of domestic and international banks for Adani Group firms?

Adani Ports and Adani Electricity will likely be able to tap committed unutilized facilities, based on the current market situation (which can change quickly) and limited interactions with a few domestic and international banks in India. However, incremental exposure to the group and specific entities will likely be selective and involve extra due diligence.

Broadly, we views banks' exposure as follows:

• Working capital facilities: In line with market practice, banks will likely roll over working capital facilities every 12 months, based on the drawing power of individual entities.
• However, in line with our methodology, we classify this as short-term debt that needs to be covered by liquidity sources. Currently, Adani Electricity and Adani Ports can cover such requirements from their cash balance, and cash from operations, until December 2023.
• Committed unutilized limits: Adani Group entities have indicated that they have unutilized limits under sanctioned facilities. The pricing terms of such facilities are decided at the time of the drawn down.
• The cost of this capital could rise due to the potential that lenders may apply an additional risk premium for Adani Group entities.

How does the leverage of unrated entities affect rated entities?

The domestic banking system, as well as some international banks and bond market investors, look at the risk of Adani entities as a group, and many set group limits on their exposure.

This may present challenges to rated entities to raise funds. This may be particularly apparent when the group is growing in multiple segments, some of which are new to the group and capital intensive, such as cement, data warehousing, and airports.

Chart 6

Does the share price of Adani Group entities matter for rated entities?

Any liquidity pressure on promoters could hit the funding availability for rated entities. Banks consider group limits, and this would include loans to promoters. The group has announced the prepayment of US$2.15 billion of share-backed loans.

Promoters of Adani Group had taken loans by pledging of some of their listed company shares. A fall in the share price could also prompt lenders to seek additional shares to maintain loan coverage levels.

Further, continued share-price declines, or lenders' refusal to accept further group securities, could result in promoters having to fund margin calls with cash. This could create negative sentiment and funding risks for rated entities.

An example is Adani Ports, which disclosed promoter share pledges of 17% of promoters' total shares as of December 2022. However, the group has subsequently disclosed the release of 11.8% shares in March 2023 and 12% in February 2023 consequent to loan repayment. This indicates the promoters had made additional share pledges created in the interim period, either to meet margin calls or for additional borrowings.

Chart 7

However, in some cases the pledges of shares don't face margin calls linked to share price moves. This includes the non-disposal undertakings for ACC and Ambuja Cements, as disclosed by Adani group.

Table 1

Why did we place the ratings on negative outlook, rather than putting them on CreditWatch with negative implications?

Greater clarity on governance and funding risks for the broader Adani Group will likely emerge beyond 90 days. This is typically the timeframe to resolve a CreditWatch. Our negative outlook is more consistent with our presumed timeline for clarity over 12 to 24 months.

It would likely take potential investigations by judicial or regulatory bodies, or any external audit initiated by the group, more than 90 days to reach a conclusion. The group will need to demonstrate continued access to domestic and international capital markets over a sustained period, in our view.

Why are the Adani project finance ratings unchanged?

The ring-fenced structure of these financings and the availability of security packages and cash flow waterfalls protect creditors from wider Adani Group-related risks.

Two Adani Group project finance transactions that we rate, AICTPL and AGEL RG2, are not exposed to refinancing risks; though there is some hedge rollover risk for AGEL RG2. They have long-dated amortizing bonds for the life of the project.

However, PSEPL RG and NQXT have bonds that mature in 2024 and 2025. The 'BB-' issue ratings on these transactions already incorporate higher refinancing costs, as per our Project Finance Methodology.

A failure to put in place a refinancing plan 12 months in advance of the maturities could lead to negative rating action.

Chart 8

Why did we revise the rating outlook on Adani Electricity to negative when it has some project finance-like structural features?

There are linkages between Adani Electricity's credit profile and that of its parent, Adani Transmission Ltd., in our view. This differentiates it from a fully ring-fenced, secured project financing.

Adani Transmission can change Adani Electricity's business strategy and cash flows as a controlling shareholder. This is because Adani Electricity operates as a corporate entity. Moreover, Adani Transmission is exposed to governance risks and funding strains that may emerge for the Adani Group.

Although Adani Electricity benefits from strong covenants and a cash-flow waterfall structure, it is only partially insulated under our methodology. Under this approach, we allow for a maximum one-notch rating differential from our credit view on the parent, Adani Transmission Ltd.

What supports the current investment-grade rating on Adani Electricity?

Adani Electricity's well-established regulatory framework, 70% share of the distribution network in Mumbai, high client diversity, and stable operating efficiency will continue to support its earnings profile. Competitive strains and the company's geographical concentration to Maharashtra offset these strengths.

The regulatory framework with assured return on equity and full recovery of costs and capital spending will support earnings stability.

Tariff adjustments and a rebound in power volumes will likely improve Adani Electricity's leverage. We project the company's ratio of funds from operations (FFO) to debt to recover to about 9%-10% in fiscal 2024, from 1.5%-3% over fiscals 2022 and 2023.

Adani Electricity's financial ratios will remain resilient over its five-year tariff block, in our opinion.

Chart 9

What supports the current investment-grade rating on Adani Ports?

Adani Ports is India's largest port developer and operator, with strategically located ports and terminals on the west and east coasts of the country. About 90% of the company's operations are from stickier origin and destination ports.

The company's high, but improving, asset concentration offset these strengths, as does its less-protected competitive market position relative to peers in Asia. The company's expansion into other markets outside of Indian could also hit its credit profile.

We forecast its net debt-to-EBITDA ratio to stay below 4x. Accretive cash flows from assets acquired and better operational performance should help ensure leverage stays below this threshold. In addition, the company will likely adjust its capex, inorganic growth appetite, and dividend distributions to prevent increase in leverage.

Chart 10

Appendix

Glossary of Adani entities

ACC--ACC Ltd.

Adani Electricity--Adani Electricity Mumbai Ltd.

Adani Green--Adani Green Energy Ltd.

Adani Ports--Adani Ports and Special Economic Zone Ltd.

Adani Total Gas-- Adani Total Gas Ltd.

Adani Wilmar-- Adani Wilmar Ltd.

AEL--Adani Enterprises Ltd.

AGEL RG2--Adani Green Energy Ltd. Restricted Group 2.

AICTPL--Adani International Container Terminal Pte. Ltd.

Ambuja Cements--Ambuja Cements Ltd.

APL--Adani Power Ltd.

ATGL--Adani Total Gas Ltd.

ATL--Adani Transmission Ltd.

ATL RG1--Adani Transmission Ltd. Restricted Group 1

ATSOL--Adani Transmission Step-One Ltd.

MIAL-- Mumbai International Airport Ltd.

NQXT--North Queensland Export Terminal Pty Ltd.

PSEPL RG--Parampujya Solar Energy Pte. Ltd. Restricted Group.

Editor: Jasper Moiseiwitsch

Digital design: Tim Hellyer

Related Research

• Adani International Container Terminal Pte. Ltd. 'BBB-' Issue Rating Affirmed; Outlook Stable, Feb. 28, 2023
• Adani Green Energy Ltd. Restricted Group 2 Issue Rating Affirmed At 'BB+'; Removed From Under Criteria Observation, Feb. 24, 2023
• Adani Transmission Ltd. ESG Evaluation Placed Under Review On Potential Governance Issues, Feb. 16, 2023
• Outlook On Adani Ports And Adani Electricity Revised To Negative; Ratings Affirmed, Feb. 3, 2023