Moody’s Investors Service has assigned a Ba3 rating to Adani Green Energy’s proposed USD senior secured notes. According to Moody’s scale of ratings, obligations rated Ba are judged to be speculative and subject to substantial credit risk. It has assigned a Ba3 rating to the proposed USD senior secured notes to be issued by Adani Green Energy Ltd (AGEL), a statement by Moody’s said adding that the outlook is stable.
AGEL will primarily use the proceeds from the USD notes to on-lend to its direct and indirect subsidiaries for them to fund the development of utility-scale renewable power projects. “The Ba3 rating assigned to AGEL’s proposed notes reflects the company’s predictable cash flow backed by long-term power purchase agreements (PPAs) that are supported by its large and diversified portfolio of solar and wind generation projects, significant capital spending plans, demonstrated capacity to deliver on growth projects, backed by its experienced management team, and very high financial leverage,” says Abhishek Tyagi, a Moody’s Vice President and Senior Credit Officer.
AGEL’s operating cash flows are stable, given the geographic diversification of its generation fleet reduces its exposure to potential fluctuations in the availability of solar and wind resources, it stated. Most of AGEL’s projects have long-term PPAs with either central government-owned or state government-owned utilities, with predefined tariffs for the duration, of the contract. As of June 2021, AGEL’s PPAs for operating projects had an average remaining life of around 20 years, which provides visibility over the company’s long-term cash flow, it stated.
AGEL has outlined a long-term target to grow its generation capacity to around 25 gigawatts (GW) by the end of the fiscal year ending March 31, 2025. This is around 5x its current operational capacity, it stated. The Ba3 rating also considers AGEL’s very high financial leverage, primarily driven by additional debt to fund its development commitment of around 20GW, it said.
Over the next two to three years, AGEL’s financial leverage as measured by its consolidated cash flow from operations pre-working capital (CFO pre-WC)/debt will be very high at about 2 per cent to 3 per cent, it stated. Moody’s leverage metrics captures AGEL’s consolidated debt balance, including the debt extended by Total Energies Group (Total, A1 stable) to Adani Green Energy Twenty Three Limited, a joint venture between Total and AGEL.
Moody’s expects AGEL’s financial metrics to gradually improve over time, because its projects, once completed and operational, will start contributing to group earnings, it said. The extent and timing of such improvements will depend on AGEL’s growth plans and the incremental debt that will be required for new development projects, it added. AGEL’s credit profile is supported by its substantial shareholders — Adani Group and Total Energies SE.
Adani Group has a track record of supporting the group company’s funding requirements through equity infusions or providing deeply subordinated loans. Such support provides AGEL flexibility in managing its capital or unforeseen external events, it stated. AGEL’s credit profile factors in Moody’s assumption that any funding shortfall for AGEL’s capital spending plans that cannot be covered by more senior debt due to covenants, will be met by deeply subordinated shareholder loans or equity from sponsors.
In terms of environmental, social and governance (ESG) factors, AGEL benefits from positive macroeconomic and sectoral trends in renewable energy and has low exposure to carbon transition risk, it said. AGEL’s business is aligned with India’s target to reduce its carbon footprint to meet nationally determined contributions. The Ba3 rating of the notes factors in moderate governance risk given the concentrated shareholding of AGEL, it stated.
However, this risk is partially mitigated by the experienced management team, which has demonstrated its strong commitment and ability to manage solar projects, it explained. The stable rating outlook reflects Moody’s expectation of AGEL’s stable cash flows from long-term PPAs over the next few years and delivery of new projects. Upward rating momentum is unlikely over the next 12-18 months based on AGEL’s business profile and financial strategy, it said. Nonetheless, Moody’s could upgrade the rating over time if AGEL sustains a higher consolidated (CFO pre-WC)/debt of above 6 per cent, it stated.
The rating could come under downward pressure if AGEL’s credit profile deteriorates on a sustained basis, potentially because of weaker operational performance, a delay in the commissioning of new projects or aggressive acquisitions and capital spending beyond Moody’s expectations.