S&P Global Ratings’ stance on the Adani group shall be determined by the group’s efforts to improve governance and funding over the next 24 months. On 22nd March, it released a report titled ‘Credit FAQ: Adani Group: The Known Unknowns’, which highlights the downside risks to the Adani group’s ratings.

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This includes restricted access to funding, slip ups in corporate governance, a probe uncovering “serious wrongdoing” or previously undisclosed related-party loans, cash leakages, etc. The ratings agency further adds that it is likely to take a negative rating action should any investigation uncover serious wrongdoing.

In early February 2023, S&P Global ratings revised the rating outlook on two Adani Group entities to negative, to reflect the governance risks and funding challenges of the wider group. The purpose of this report is to highlight to investors, the reasons for rating action, and the watch points and timeline for the negative outlook.

The group aims to refinance a US$4.5 billion bridge loan by the end of 2023, to buy Ambuja Cements Ltd. and ACC Ltd. S&P Global Ratings says the terms of any longer-term loan to refinance the acquisition loan would signal the funding appetite of domestic and international banks to lend against cash flows from operating entities. It shall also review the group's ability to raise equity and debt, both via private placement or through public debt markets.

If allegations of illegal activities or misconduct at the shareholder level prove true, the ratings agency would have a more negative view of the governance of group entities. This is because the ownership of most Adani Group entities is held by the same promoters, related-family entities, and trusts.

Adani Group companies have significant recurring transactions with related parties in regular business. This include Adani Ports' provision of ports services on a chargeable basis to Adani Enterprises Ltd., and Adani Electricity's fuel procurement from Adani Green Energy based on public tender.

Also, there are unusual material transactions with potential credit exposure. This includes certain transactions by Adani Ports which exposes it to counterparty credit risks, such as providing loans and inter-corporate deposits to external entities, which can expose the company to potential payment defaults and delays.

The lack of lumpy debt maturities in 2023 and staggered debt maturities over the next few years reduce the immediate liquidity and refinancing risks for the entities that S&p Global Ratings rate. Based on information provided by management, no Adani Group firm that it rates has material refinancing needs in 2023. All appear to have adequate available funds to meet their near-term debt maturities. In addition, Adani Ports and Adani Electricity will likely generate healthy operating cash flows and maintain flexibility in adjusting capex, based on funding availability.

Rated Adani Group entities significantly rely on dollar bonds and access to dollar markets, and the cost of this funding is important. Current difficult market conditions and the sharp rise in U.S. interest rates have already severely limited issuance of U.S. dollar debt for all Indian companies, including Adani Group. Further, S&P Global Ratings says Adani project finance ratings were unchanged because the ring-fenced structure of these financings and the availability of security packages and cash flow waterfalls protect creditors from wider Adani Group-related risks.

What supports the current investment-grade rating on Adani Electricity is its regulatory framework with assured return on equity and full recovery of costs and capital spending that shall support earnings stability. Likewise, what supports the current investment-grade rating on Adani Ports is the expectation that its net debt-to-EBITDA ratio shall stay below 4x. Accretive cash flows from assets acquired and better operational performance should help ensure leverage stays below this threshold.