Fitch Removes Adani Energy From ’Rating Watch Negative’ List, But Flags Potential Rating Risks

Fitch Ratings has removed Adani Energy Solutions, the billionaire Gautam Adani-led group’s energy infrastructure arm, from its 'Ratings Watch Negative' list and assigned a 'Negative Outlook'.

“We believe the risks associated with the group's liquidity and funding requirements have moderated,” Fitch said in a note on March 10.

However, it said, “The outlook is Negative to reflect our view that the proceedings and outcome of the US investigations could reveal that the group's corporate governance practices are weaker than we expected and lead to negative rating action in the near to medium term. Fitch will monitor the investigations for any evidence of weakness in the entities' governance practices and internal controls, and the impact on Adani Energy Solutions' financial flexibility.”

The international rating agency has affirmed the company’s long-term foreign- and local-currency issuer default ratings (IDRs) at 'BBB-'.

Fitch has affirmed the ratings as the Adani group has demonstrated adequate funding access since the US indictment of certain board members of another group entity, Adani Green Energy, on November 20, 2024, it said in the note.

Fitch also reaffirmed the 'BBB-' rating for two sets of bonds issued by the company's subsidiary, Adani Transmission Step-One Limited – one worth $500 million at 4.0 per cent interest due in 2026, and another $500 million at 4.25 per cent interest due in 2036.

Factors That Could Lead To Further Downgrade

Fitch, in its note, highlighted several factors that could lead to a downgrade of Adani Energy Solutions. These include weakened financial flexibility through higher funding costs or limited funding access, proven allegations of bribery or securities fraud, or further deterioration in governance and internal controls.

Financial metrics like an EBITDA/net interest cover below 2.0x (currently 2.3x) or EBITDA net leverage above 6.0x (currently 5.4x) for a sustained period could also trigger a downgrade. Additionally, a downward revision of India’s Country Ceiling could negatively impact the company’s long-term foreign-currency IDR and its bond ratings.

Factors That Could Lead to Rating Upgrade

The rating agency said that Adani Energy Solutions' outlook could be upgraded to stable if the risks of negative outcomes from US investigations are resolved and funding access remains unaffected.

As of September 2024, the company held Rs 60.6 billion in cash against current maturities of Rs 29.6 billion and faces no significant debt maturities until August 2026. The company, a major private power transmission company in India with projects across 14 states and 74.9 per cent ownership of Adani Electricity Mumbai, benefits from a strong regulated asset base. However, the power transmission company's Environmental, Social, and Governance (ESG) considerations, including a complex group structure and concentrated ownership by the Adani group, negatively impact its credit profile with a relevance score of '4.'

ESG is a framework that measures a company's performance on environmental, social, and governance issues. It's used to assess a company's sustainability and ethical impact.