Fitch Ratings has assigned Adani International Container Terminal Private Limited’s (AICTPL) proposed US-dollar senior secured partially amortising notes due 2031 an expected rating of ‘BBB-(EXP)’. The Outlook is Negative.
The final rating is 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 proposed notes.
AICTPL benefits from its strategic position within the primary port of call in north-west India, revenue stability from long-term cargo and high operational efficiency. We regard the volatility of AICTPL’s revenue as low due to its affiliation with Mediterranean Shipping Company S.A. (MSC) through its 50% parent, Terminal Investment Limited (TIL); TIL, which is majority owned by MSC, is the world’s sixth largest container terminal operator. MSC is able to reduce AICTPL’s volume volatility, as this is in its interest as an indirect shareholder and also through its commitment to allow AICTPL to use its facilities when possible and through its vessel sharing alliance with Maersk Line. Furthermore, we believe the strong origin and destination nature of AICTPL’s portfolio and the low revenue contribution from transshipment mitigates volume volatility. However, this is balanced against customer concentration risk, a limited operational record, no tail in the transaction and a back-loaded amortisation profile.
AICTPL experienced higher volume during the peak of the coronavirus pandemic, but volume dropped by about 19% in April 2020 compared with the monthly average of January-March. Volume subsequently rebounded in July-September to pre-pandemic levels, resulting in AICTPL recording 22% yoy volume growth in the half-year ended September 2020 (1HFY21). AICTPL also increased its market share at Mundra Port to 45%, from 36% in FY20.
Fitch’s rating case projects an average debt service coverage ratio (DSCR) of 2.28x, with a minimum of 0.91x in 2031. AICTPL’s underlying rating of ‘bbb’ is capped by India’s Country Ceiling of ‘BBB-‘. The Negative Outlook reflects the Negative Outlook on India’s Long-Term Issuer Default Rating.
KEY RATING DRIVERS
Best-in-Class, but Large Single Counterparty: Revenue Risk: Volume − Midrange
AICTPL is one of Mundra Port’s four container terminals. The port is India’s largest by container throughput and the gateway to landlocked north-western India. AICTPL is positioned as the transshipment hub of the country’s west coast. Transshipment cargo contributed more than 30% of the terminal’s throughput, but less than 20% of revenue. AICTPL’s 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).
AICTPL has a long-term terminal service agreement with MSC, under which MSC is required to use AICTPL when its container ships call at Mundra Port, subject to AICTPL’s availability. MSC’s cargo contributes more than 70% of AICTPL’s throughput, but we believe such counterparty risk is mitigated by the terminal’s strategic location, strong hinterland that supports the port and state-of-the-art infrastructure. Should MSC go bankrupt, other shipping lines are likely to fill the void, given capacity constraints at Mundra Port’s other terminals. However, our volume risk assessment is moderated by customer concentration, volatile transshipment volume and AICTPL’s limited operational record.
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, SCP: bbb ). AICTPL’s long-term terminal service agreement with MSC sets a fixed price with annual tariff adjustments 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 container terminal sector norms, which weighs down our price-risk assessment.
AICTPL also negotiates tariffs with customers on an annual basis without take-or-pay or minimum guarantee throughput clauses.
Limited Capex Requirement: Infrastructure Development/Renewal − Stronger
AICTPL has a utilisation rate of about 57%-67%, against an optimal level of below 70%. Capacity should be sufficient to support our medium-term throughput forecast, with other container terminals at Mundra Port being close to or above their optimal utilisation levels. AICTPL’s best-in-class equipment and deep draft enables it to handle ultra-large vessels and the terminal requires limited maintenance capex for infrastructure, while maintenance dredging is carried out by APSEZ; under the sub-concession agreement, APSEZ must maintain a minimum depth of 15.5 metres at the entrance channel and turning circle and 17.5 metres alongside the berth at no cost to AICTPL.
Robust Structural Protection: Debt Structure − Stronger
The proposed US-dollar million debt is a senior secured 10-year partially amortising note, with a 21% 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 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 and risk from a 20.5% balloon repayment at maturity is mitigated by a senior debt restricted amortisation account, into which the issuer is required to sweep cash up to the outstanding debt service amount, including principal and interest, starting from three years prior to the maturity date.
APSEZ is India’s largest commercial port operator and benefits from a diverse portfolio, royalty income from sub-concession agreements and long-term cargo, which accounts for about 60% of total traffic. APSEZ is the concession holder for Mundra Port and one of AICTPL’s shareholders. This compares with AICTPL’s single portfolio that operates one terminal of four Mundra Port. However, AICTPL benefits from a strategic location at Mundra Port as the gateway to north-western India, state-of-the-art infrastructure, operational efficiency and an integrated logistics solution. AICTPL has significant exposure to MSC as one of its indirect shareholders, while APSEZ has a diverse portfolio and customers. AICTPL has a stronger debt profile, influenced by its amortisation debt profile that is protected with robust covenants and security, while APSEZ utilises a corporate-like debt structure. APSEZ’s net debt/EBITDA, under Fitch’s rating case, averages at 3.1x over five years, with a maximum of 3.6x.
PT Pelabuhan Indonesia II (Persero) (Pelindo II, BBB/Stable; SCP: bbb) has the largest container market share in Indonesia and benefits from stable rental income from joint ventures. Meanwhile, AICTPL has a long-term cargo commitment from MSC, one of the world’s largest shipping companies. Pelindo II has an intensive capex plan for expansion, while AICTPL has limited capex requirements, with sufficient internal accruals to fund capex, which justifies a stronger infrastructure-renewal attribute for AICTPL. AICTPL also has a stronger debt profile, influenced by its amortsation debt profile, which is protected with robust covenants and security, while Pelindo II utilises a corporate-like debt structure. Pelindo II’s net debt/EBITDA, under Fitch’s rating case, averages at 3.5x over five years, with a maximum of 4.6x.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
We do not expect positive rating action in the near term due to significant customer-concentration risk, no tail and back-loaded amortisation profile, although the rating is supported by the port’s strategic position as well as debt structure that limits refinance risk associated with the bullet. A revision of the Outlook on the sovereign rating to Stable would indicate that the Country Ceiling is likely to remain at ‘BBB-‘ and would lead to a revision of the Outlook on AICTPL to Stable.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A lowering of India’s Country Ceiling to ‘BB+’ and if the average annual DSCR in Fitch’s rating case drops below 1.8x persistently due to operational underperformance.
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.
AICTPL, the proposed note’s direct issuance entity, is a 50/50 joint venture between APSEZ and TIL to develop and operate container terminal three and an 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 42 strategically located terminals at key ports on major shipping routes in 25 countries across five continents. TIL was formed in 2000 to secure berths and terminal capacity for its majority shareholder, MSC. MSC is the world’s largest container shipping line. Meanwhile, APSEZ operates 10 ports across India, including one port which is under construction. It is India’s largest private port operator, handling 223 million metric tonnes of cargo in FY20. This represented more than 20% of India’s total port throughput.
Fitch’s base case reflects AICTPL’s forecasts for operational parameters, with the exception of the US dollar/Indian rupee rate adjustment, which is in line with Fitch assumptions. We exclude the terminal value from cash flow available for debt service so as to assess the amount from actual operation only. Our base case incorporates throughput growth of 10% in FY21 and 5% a year thereafter, against 14.7% in FY21 and 5% a year thereafter, capped at 75% in the management case and 17.5% in FY21 with a CAGR of 5.3% in FY20-FY31, capped at 100% utilisation, in the Drewry low case. Fitch’s base case generates an average DSCR of 2.55x, with a minimum of 1.09x in 2031 and 2.14x in 2030, excluding 2031. The base case generates a five-year average net debt/EBITDA of 3.1x, with a maximum of 3.9x.
Meanwhile, the Fitch rating case incorporates lower throughput growth of 5% in FY21 and 5% a year thereafter, lower tariff growth of 2% a year and 10% opex stress across all periods, excluding royalty expenses, waterfront charges and railhead passthrough, as these are linked to revenue. Fitch’s rating case generates an average DSCR of 2.28x, with a minimum of 0.91x in 2031 and 1.84x in 2030, excluding 2031; 2031 is the end of concession and repayment period. Repayment in 2031 is mitigated by a senior debt restricted amortisation account building up in the last three years prior to the maturity date of the proposed 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 is excludes this account. The Fitch rating case generates a five-year average net debt/EBITDA of 3.4x, with a maximum of 4.3x.
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.
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