Adani Abbot Point has provided its financial results for its FY16 reporting period
Adani Abbot Point Terminal (AAPT) has provided its financial results for the reporting period to 31 March.
Being effectively an infrastructure asset, a key performance metric for the terminal is cashflow relative to debt servicing costs. AAPT measures this in terms of a cashflow cover ratio (CFCR) and a table of historical CFCR’s is provided below. The CFCR as reported during this time has been above 2 times. This effectively means that Adani’s net operating cashflows have been sufficient to cover its senior interest by a factor of at least 2 and performance has stabilised in the last two reporting years. By comparison Sydney Airport’s last reported CFCR was 2.45x.
Source: Adani
Another key metric we look at is the actual utilisation at the terminal. While terminal revenues are based on the contracted capacity (around 50 million tonnes per annum or mtpa), a higher utilisation level is generally seen as positive as it shows that the export capacity is being used by the coal shippers.
AAPT’s terminal utilisation is outlined in the table below. The main observation is that the utilisation level at the terminal seems to have flat lined in FY16, with annual volumes falling from 28.4mt to 26.8mt or roughly a 54% utilisation rate. Adani expects a further 5 million tonnes coming on line from Byerwen later this year which would increase utilisation by about 10%. However, ramp up of terminal utilisation is below expectation and if the utilisation were to remain between 50%-60% it would suggest there is excess capacity at the terminal which could become a risk issue over the medium term, as the take or pay contracts expire. We reiterate though that the cashflows from the terminal are derived from contracted terminal capacity, not actual throughput volumes and therefore the shippers are obligated to pay for the 50mtpa contracted capacity through the life of the contracts.
Source: AAPT
We see the following near term events as key considerations for the credit:
- Management of 2018 refinancing task: AAPT has approximately A$1bn of debt which matures in 2018, or roughly two thirds of its total debt. About half of this debt has come from banks while the other half was raised in the AUD bond. Such a large amount of debt maturing in a single year creates refinancing risk and we believe AAPT needs to pro-actively manage the repayment or refinancing of this debt ahead of 2018. Adani has announced a plan to inject A$75m of equity into the project to pay down debt. We understand that A$25m has been injected with a further A$50m to be injected within the next month after which AAPT will use these proceeds to pay down a portion of the 2018 debt
- Renewal of Glencore take or pay contract: Glencore holds a 13m tonne per annum contract with the terminal which expires in June 2020. Glencore must provide 3 years’ notice to the terminal of its renewal intentions around the contract. Glencore’s renewal of its take or pay contract will have an important bearing on the credit profile. Our baseline expectation is that Glencore will renew its contract, but potentially for a smaller level of capacity (perhaps 8-9mtpa) as it is not utilising the full 13mtpa allowance after closing the Collinsville mine which was exporting from the terminal. Uncertainty around the Glencore contract renewal could make the 2018 refinancing task more challenging for AAPT
- Reset of take or pay charge: The terminal take or pay charge resets every five years with the next reset date occurring on 1 July 2017. The determination of the charge is based on a return on asset, adjusted for economic depreciation and inclusive of operating expenses and tax. At this time, it is expected the terminal charges will reduce to take into account of lower cost of capital in the five years between 2012-2017.
- Abbot Point expansion: Expansion at the Abbot Point terminal (described as the ‘T0’ expansion) has been contemplated by Adani to cater for the proposed development of the Carmichael mine. At this stage, we see the T0 expansion at the terminal looking increasingly unlikely as plans to develop the Carmichael mine have stalled. Our view is that this is positive for the existing terminal because
1) it frees up capital at the parent company (Adani) level which would have been used to finance the expansion (and further development of the Carmichael) to invest into the existing terminal and
2) it limits the supply of terminal capacity at Abbot Point restricted to the existing terminal
Since the affirmation by S&P of their investment grade rating of the terminal, pricing on the AAPT has somewhat recovered from previous lows. The Adani bonds are currently offered at the following indicative levels. Please note the yields quoted below include a 1% step up in the coupon while Moody’s retains its current sub investment grade credit rating.
2018 bond - 8.03%. Available to wholesale investors only with a minimum face value of AUD200,000 2020 bond - 8.23%. Available to retail and wholesale investors with a minimum face value of AUD10,000
While both bonds offer high yields, we note that the bonds carry some heightened near term risks which are reflected in these higher returns. While having a higher minimum face value for investment, the 2018 bond appears to show the better relative value on current pricing levels versus the 2020 bonds. We also expect Adani will target the 2018 bond through early buybacks as part of its debt reduction plan and management of the 2018 refinancing task. We note the Adani Group's announced plan to strengthen AAPT's capital structure over time through a combination of cash equity injections (A$75m) and applying AAPT's future free cashflow (A$165m) to reduce debt levels.
Please contact your FIIG representative for further details on the Adani Abbot Point bonds. Pricing updated as of 14 June 2016 but subject to change.