Moody's downgrades AAP Terminal
Moody's Investors Service on Monday downgraded infrastructure conglomerate Adani Group's Adani Abbot Point Terminal Pty Ltd's (AAPT) senior secured and senior secured bank credit facility rating to Ba2 from Baa3.
Moody's said the outlook on the ratings is negative. The rating action concludes the review for downgrade initiated on 21 December 2015, Moody's said in a statement. AAPT is part of a 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 Ports Corporation. Adani Ports and Special Economic Zone Ltd (that has Baa3 stable rating) is the ultimate holding company of the AAPT obligor group.
"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," said Mary Anne Low, a Moody's analyst, adding, "The ongo- ing 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.
Moody's believes that the current coal market downturn is structural in nature, with weak conditions likely to persist. Such conditions will 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, it said. In February, Adani Group had secured the approval of the Queensland government for the $16.5 billion Carmichael mine project in the state's Galilee Basin, clearing one more obstacle to start work on the coal mine, amid protests from environmental activists in Australia.
According to Queensland's department of environment and heritage protection, it has issued a final so-called environmental authority for Adani's project. The group needs to secure funding for this project and a mining lease from the Queensland government. In December, Australia had allowed expansion of the Abbot Point coal terminal in Queensland, which will enable shipping of the fuel from mines in the Galilee Basin, including the Adani Group's $16 billion Carmichael mine. The latest approval will make the Abbot Point terminal one of the world's largest coal ports.
The controversial expansion, which will see 1.1 million cubic metres of material dredged near the Great Barrier Reef, was granted approval with 29 riders. The approval follows an Australian court spiking a green group's attempt to block the Carmichael project, and recommending mining leases in October. Adani is facing a number of problems in Australia. Adani Mining Pty Ltd, a unit of the group, is aiming to develop the Carmichael coal mine, which is expected to yield 60 million tonnes of coal a year. The company is building a 189km railroad to transport the coal.
The project has been opposed by green groups. Adani claims the mine project will create 10,000 jobs and generate $22 billion in taxes and royalties.
On 15 October, the Australian government re-approved the Adani Group's coal mine and rail project in accordance with the country's environment laws, subject to 36 conditions. Australia's environment minister Greg Hunt had then said that the approval is subject to "36 of the strictest conditions in Australian history". "The negative outlook however reflects the ongoing challenging industry conditions, and a degree of uncertainty as to whether AAPT will generate sufficient free cash flows to achieve the anticipated deleveraging, given that such cash flows are dependent on the continued ability of AAPT's counterparties to honour their take-or-pay contracts," Moody's said in a statement.