New Delhi: Moody's Investors Service on Monday downgraded Adani Group's Abbot Point Terminal Ltd's (AAPT) bank credit facility rating, saying its outlook is negative.
"Moody's Investors Service has today downgraded AAPT senior secured and senior secured bank credit facility rating to Ba2 from Baa3. The outlook on the ratings is negative," Moody's said in a statement.
The rating action concludes the review for downgrade initiated on December 21, 2015, it said.
Ba2, a long-term rating, is judged to have speculative elements and a significant credit risk while Baa3 is a medium grade with some speculative elements and moderate credit risk.
AAPT is part of an obligor group that has economic ownership of the Abbot Point Coal Terminal in North Queensland under a 99-year lease with state-owned lessor North Queensland Bulk Port Authority.
Adani Ports and Special Economic Zone Limited is the ultimate holding company of the AAPT obligor group.
Moody's said, "The ratings downgrade reflects the increasing likelihood of material volatility in AAPT's cash flows due to the weakened position of AAPT's coal mining counterparties, the sole source of such cash flows."
Moody's analyst Mary Anne Low said, "The ongoing severe pressure facing the coal sector translates into an increased likelihood of AAPT's counterparty contracts either not being renewed or subject to early termination."
Given the material challenges facing the coal sector, Moody's considers that AAPT's financial leverage and debt coverage metrics are no longer consistent with the previous ratings.
It believes that the current coal market downturn is structural in nature, with weak conditions likely to persist. Such conditions will continually erode the mine counterparties' financial capacity over time, increasing the likelihood of a default.
Unlike other infrastructure asset classes such as airports and toll roads, which ultimately derive revenue from an extensive and broad base of customers, Moody's believes that if an AAPT counterparty defaults, weak coal market conditions will make it challenging for AAPT to secure replacement tonnage on equivalent terms.
High levels of coal production and shipments to date by mine counterparties are not necessarily synonymous with ongoing profitability at some coal mines and may be indicative of mines maximising production in order to generate sufficient cash flows to cover their fixed cost base, it said.
"Such a situation may not be sustainable for mines at current coal prices. Furthermore, downside risk associated with coal prices remains high, and deterioration in coal prices from current levels will add more pressure on coal mines supplying AAPT's coal terminal," the statement said.