S&P has affirmed Adani Abbot Point Terminal’s investment grade credit rating with a stable outlook
On 20 May, S&P affirmed Adani Abbot Point Terminal’s (AAPT) investment grade credit rating and maintained a stable outlook. In its rating opinion, S&P makes the following statement in justifying the rating decision – “Ultimately, despite the current pressures on the industry, AAPT's robust performance under a stress scenario and our view that the coal in the Bowen Basis will continue to be exported over the medium term support AAPT's credit quality.”
As we have previously outlined, S&P is adopting a less bearish view on coal versus Moody’s and this is translating to wider differences in credit opinions across the two rating agencies when it comes to coal related bonds. With a 1% coupon step up applicable on the bonds following the next coupon date on 29 May, investors can currently earn a near double digit yield for taking an exposure to the AAPT 2020 bond.
The key points from the S&P rating opinion are set out below:
- Despite coal volumes plateauing at the terminal, S&P continues to expect stable cashflow generation over the medium term and does not currently expect a material reduction in contracted capacity
- AAPT can fully amortise its senior debt within 12 years if required. This provides a buffer against rapid declines in economic reserves in the region as S&P consider, it is unlikely that coal production in Queensland would cease within that time frame. S&P considers that the high quality, low cost coal that is produced in the region will underpin demand
- S&P believes that the project's ability to repay debt under downside conditions will underpin the rating. They have assessed this risk by assuming that revenues decline by 15%, credit spreads increase to 3.5%, and the volume weighted mine life is reduced to 16 years compared with the most recent assessment of 56 years. Under these conditions, S&P estimates that the project can still fully repay outstanding debt within 13 years and in their opinion demonstrates the project's robust performance under stress
- The outlook remains stable, reflecting the stability and predictability of the project's cashflows
The AAPT bonds are currently offering good returns for taking a ‘crossover’ credit exposure (where a bond has both an investment grade and sub investment grade credit rating from different rating agencies at the same time). After the next coupon payment on 29 May, an additional 1.00% step up is applicable on the coupon while Moody’s retains its current sub investment grade credit rating on AAPT. Bonds are offered at the following indicative levels (pre coupon step up). Please note pricing is volatile post the rating affirmation, so and may take a few days to settle: 2018 bond: $96.00 / yield to maturity 8.60% (coupon stepped up). Available to wholesale investors only 2020 bond: $92.00 / yield to maturity 8.50% (pre 1% step up EOM). Available to both retail and wholesale investors
If the additional 1% coupon step up applied for the full duration of the bond, the 2020 bonds would yield nearly a double digit yield to maturity at current pricing levels, although yields may tighten in coming days as support for the bond increases following the rating affirmation.
The affirmation of the S&P rating is supportive for the 2018 refinancing task because AAPT’s cost of refinancing its 2018 debt will be cheaper if this investment grade rating holds and will attract a larger liquidity pool of refinance debt. There is the risk that S&P does downgrade AAPT between now and 2018, however based on the commentary in the current rating opinion, we see the likelihood of an S&P downgrade as low.
We see the future prospect of bond buybacks by the issuer as likely while both bonds trade at a reasonable discount to par. AAPT has earmarked around A$250m in cash retention over the next two years as part of a debt reduction strategy, although this is not a committed figure.
Note: Pricing accurate as at 23 May 2016 but subject to change.
Please contact your FIIG representative for further details on the AAPT bonds. Available to retail and wholesale investors.