This week the credit margin on the Adani Abbot Point Terminal (AAPT) 2018 and 2020 bonds has increased by around 30 basis points (bps), with the credit margin on both now around 300bps over swap
The move wider seems to be in relation to a number of recent news reports, particularly the article “Adani’s Carmichael Mine is unbankable says Queensland Treasury
” published in the Sydney Morning Herald on 30 June. With coal prices remaining near multi-year lows, we have held the view for some time that the Carmichael project has a low probability of proceeding in the medium term and will require an improvement in coal prices for the numbers to stack up.
Further, there have been persistent reports that Adani is struggling to secure financing of the $16.5bn project given the low coal price environment. In late June there were also reports that Adani had halted engineering work on the Carmichael Project. As such, this recent news is of no surprise.
Whilst the Carmichael Mine and its potential throughput has no direct impact on the existing AAPT bonds or the take or pay contracts (none of those contracts relate to coal from the Carmichael Mine), there is an indirect impact should it proceed. Production of coal from the Carmichael Mine would increase demand for coal terminal services and this would likely be met by an expansion of the Abbot Point Coal Terminal (i.e. the controversial expansion that requires dredging near the Great Barrier Reef) and could also provide a backup plan for the existing terminal should one or more of those take or pay contracts not be renewed.
Put simply, if the Carmichael Mine project does not proceed this would remove some of the flexibility or backup plans that Adani could employ for the existing terminal (and AAPT bonds) in the longer term (say 2020 and beyond). However, we view this project as a low probability unless there is a material improvement in coal prices. Also, the existing terminal does not rely on throughput from the Carmichael Mine.
Other reports this week included:
- the news that the Great Barrier Reef was not placed on the endangered list, removing one of the impediments to an expansion of the Abbot Point Terminal, which if built will increase “supply” of coal port terminal services , potentially to the detriment of the existing terminal and AAPT bonds. However, as detailed above, with the low price of coal at present both the Carmichael Mine project and Abbot Point Terminal expansion are viewed as low probability
- China rejecting some coal shipments from Australia as they are not meeting new import quality restrictions, although this is seen to have minimal impact on AAPT and is a more an issue for coal producers
- A fall in commodity prices across the board over the last week
As previously written, we expect negative news flow concerning Adani to continue due to the controversial port expansion and more recently the viability of the Carmichael Mine Project. While on balance, the recent news is seen as slightly negative it is important to note it does not have a direct impact to the existing AAPT bonds that are based on a ring-fenced and structured finance transaction backed by long term take or pay contract from existing mines/miners - with no direct link to either the Carmichael Mine or the Abbot Point terminal expansion.
The greatest risk for the AAPT bonds has always been and remains the long term price of coal. The longer it remains depressed, the higher the risk of, reduced output, mine closures and stress in the Australian coal market. This in-turn could impact contract renewals and re-negations. However, we note that the vast majority of take or pay contracts are not up for renewal until 2020 and beyond, giving significant time for the coal price to recover.
At credit margins around 300bps, the AAPT bonds are considered to be more than commensurate for the risks (assuming a return to long term average coal prices in the period leading up to 2020).
Related news articles
Adani’s Carmichael Mine is unbankable says Queensland Treasury – 30 June 2015
'Inconsistent' quality tests see China reject Australian coal – 1 July 2015
UNESCO stops short of protecting Great Barrier Reef; environmentalists fume, Adani gets a breather – 2 July 2015