Correction: Fitch Affirms Adani Abbot Point Terminal at 'BB+'; Off RWN; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-06 October 2020: This is a correction of a release published 22 September 2020. It provides clarity on the entity's ESG Relevance Scores by summarising all relevant commentary under the associated Key Rating Drivers and ESG Considerations sections. Fitch Ratings has affirmed the 'BB+' ratings on Australia-based Adani Abbot Point Terminal Pty Ltd's (AAPT) senior secured debt. The ratings have been removed from Rating Watch Negative and the Outlook is Stable. This reflects the resolution of the refinancing requirements in 2020 and Fitch's assessment that the company is managing the September 2021 debt maturity. AAPT refinanced the May 2020 maturity by way of subordinated shareholder loans from its shareholder, and has secured similar funding to repay the debt maturing in November 2020. The financing options are limited by lenders' increasing concerns relating to ESG considerations over coal assets, compounding the structural refinancing risk of AAPT's bullet debt maturities. As a result, Fitch has revised AAPT's ESG Relevance Score for Governance: Management Strategy from a '4' to a '5', as detailed in the Key Rating Drivers section. The coronavirus pandemic and government containment measures worldwide have created an uncertain global environment for the seaport sector. AAPT's most recently available issuer data may not have indicated an impairment in performance, but material changes in revenue and cost profile are occurring across the sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch's ratings are forward-looking in nature, and we will monitor developments in the sector as a result of the pandemic's severity and duration, and incorporate revised base- and rating-case qualitative and quantitative inputs based on our expectations for future performance and assessment of key risks. RATING RATIONALE The ratings take into account the stable cash flow from the medium- to long-term take-or-pay contracts with port users. AAPT is well-located to serve coal mines in Queensland's northern and central Bowen Basin as well as the large mines under development in central Queensland's Galilee Basin. The user contracts allow full pass-through of the terminal's fixed and variable operating expenses. The terminal is unregulated and resets tariffs every five years. Users can seek arbitration at the time of reset if they disagree with AAPT's determination of the terminal infrastructure charge (TIC). There was a recent court judgement relating to the litigation between AAPT and four users concerning handling charges that awarded an aggregate AUD106.8 million (plus interest and costs) in damages to the users. We understand that AAPT made an initial aggregate payment of A$39.0 million to the four users on 18 September 2020. The balance to be paid will be funded by drawdown under a new subordinated shareholder loan provided by AAPT's shareholder. We also understand that AAPT has a right to appeal the judgement in the Court of Appeal of the Supreme Court of Queensland, and a decision on whether to file an appeal will be taken by AAPT shortly. The port's reliance on coal limits the rating even though a majority of the coal that passes through the port is metallurgical, which Fitch regards as having less risky long-term demand than thermal coal. Australian exporters are vulnerable to long-term changes in global coal-market dynamics, but Fitch's analysis demonstrates AAPT's strong resilience to low coal prices. AAPT's high leverage constrains the ratings. Net debt/EBITDA is likely to peak at 7.9x in the financial year ending March 2021 (FY21) in Fitch's rating case, but should drop to 6.8x in FY24 once a contract with Adani Mining starts. KEY RATING DRIVERS Mainly Low-Cost Users: Volume Risk - Midrange Fitch regards AAPT a secondary port as it solely handles coal. The port's users provide some diversity of product and sources but AAPT is highly concentrated, with approximately 60% in metallurgical and 40% in thermal coal. The production cash costs of the metallurgical mines are mainly in the lower half of the curve and are well below Fitch's long-term price forecast of USD140/tonne. The thermal coal mines are grouped at the high end of the cost curve, but they also benefit from producing profitable metallurgical coal. Contracted capacity is less than the nominal capacity of 50 million tonnes per annum (mtpa). Adani Mining has signed a contract for 9.3 mtpa beginning 1 July 2022 to service its Carmichael Mine that is under development in the Galilee Basin, with a short-term capacity contract for 4.5 mtpa starting August 2021 (of which 2.5 mtpa is on take-or-pay basis). AAPT has strong rail transportation links with its customers, particularly those in the northern Bowen Basin that are relatively close to the port; these represent 26 mtpa of contracts. For the mines further south, AAPT faces greater exposure to competition from the lower-cost Dalrymple Bay Coal Terminal (DBCT) about 200 km to the southeast. DBCT is fully contracted, limiting the competitive impact in the near term. Mines under development in the Galilee Basin in central Queensland are planning rail lines to link to Abbot Point. Fitch expects any new port facilities to be substantially more expensive than AAPT because of higher construction costs. Medium-Term Ship-or-Pay Contracts: Price Risk - Midrange AAPT benefits from a weighted-average contract life of more than six years of ship-or-pay contracts, which total 39.8 mtpa of capacity. AAPT is not regulated, although users pay a TIC that allows AAPT to earn a market return on its depreciated asset value. Fixed and variable operations and maintenance costs are passed through to the users. Payment is on a ship-or-pay basis, and no force majeure waiver exists. AAPT resets the TIC every five years based on an updated return calculation and forecast of capex to be incurred during the next five years. The users can refer the calculation to arbitration to contest the price. If any user does not renew or defaults, the TIC for the remaining users is increased at the next price reset to maintain AAPT's return. Fitch believes that in practice, the TIC is a negotiated outcome between AAPT and its users, as occurred in 2012, resulting in the charge generally rising with inflation. Following the 2017 price reset four of the users requested arbitration to set the fees, which have now been finalised. Well-Funded Maintenance: Infrastructure Development and Renewal - Midrange The port's capacity expansion to 50 mtpa was completed in 2012 and it is fully operational. AAPT incurred around AUD130 million of capex over the past six years, including the upgrade and replacement of a ship loader and a stacker-reclaimer, which were added to the depreciated asset value used in the TIC calculation, in accordance with the technical advisor's recommendations in 2012. We forecast annual maintenance capex at around AUD10 million under the rating case, covered by cash flow from operations. Debt Structure - Midrange The bullet debt structure creates refinancing risk, which is compounded by the exposure to the coal market and lenders' increasing environmental concerns about such assets. Creditors benefit from a good security package, including step-in rights under a tripartite agreement with the government lessor, as well as a six-month debt-service reserve account and interest and currency hedging requirements. The cash flow coverage ratio covenants include distribution lock-up at 1.40x and default at 1.10x, which are weaker because no principal is currently being amortised. A volume-weighted average mine life of AAPT's users below 16 years triggers a 75% cash sweep to a senior debt redemption account and a debt amortisation programme would be incorporated in the next refinance structure. The cash sweep increases up to 100% if AAPT deems it necessary. Financial Profile The Fitch rating case results in a 25-year project life cover ratio (PLCR) of 1.7x, indicating a good ability to amortise debt over that period, if required. The minimum interest coverage ratio is 1.7x in FY29, above the lock-up covenant of 1.4x. The maximum debt/EBITDA of 7.9x in 2021 is quite high, but decreases to 6.8x in 2024, when the contract with Adani Mining starts and for which it has provided an AUD138 million security deposit to AAPT. Fitch's breakeven analysis demonstrates that AAPT can sustain a contracted level as low as 23.0 mtpa, or 46% of capacity, while still covering its interest costs. ESG - Governance AAPT has an ESG Relevance Score of '5' for Management Strategy. The elevated score reflects the company's bullet-amortisation debt structure which creates refinancing risk and is compounded by the exposure to coal markets and lenders' increasing environmental concerns about such assets. Management strategy is a key rating driver that has a significant impact on the rating on an individual basis. PEER GROUP AAPT's closest peer is Queensland-based DBCT Finance Pty Limited (BBB-/Stable), the financing vehicle for the operator of DBCT, which like AAPT, is a single-purpose coal export terminal but with a higher capacity of 85 mtpa. DBCT users also have ship-or-pay contracts but with a weighted-average term of 8.6 years, compared with more than six years at AAPT. Both terminals have a similar mix of users without parent company guarantees, with some user concentration. Both issuers have high leverage, with AAPT's net debt/EBITDA reaching a maximum of 7.9x in FY21 in Fitch's rating case, with a five-year average of 7.2x, while DBCT's average net debt/regulatory asset base is 80% over the next five years. Newcastle Coal Infrastructure Group Pty Ltd (NCIG, BBB-/Stable), a New South Wales-based coal export terminal, is also a close peer. NCIG has a stronger contractual structure with rolling 10-year terms, although both terminals have ship-or-pay contracts, and termination by an NCIG user essentially requires a payout of the user's pro rata share of the capital cost of the terminal. Both issuers use bullet-maturity debt instruments, but NCIG incorporates partial amortisation and plans to fully repay its senior debt by 2038. AAPT's throughput consists mainly of metallurgical coal, which Fitch sees as less risky in terms of long-term demand than thermal coal, which makes up the majority of NCIG's throughput. Port of Melbourne (issuing entity Lonsdale Finance Pty Ltd, BBB/Stable), the primary port of call serving the Victorian and broader south-east Australian market, has stronger key rating driver assessments, including volume, price and infrastructure development and renewal. The port has much more diverse throughput with minimal commodity exposure, unlike AAPT, which is exposed to more volatile commodities as it is used solely for coal exports. Port of Melbourne has higher leverage than AAPT with net debt/EBITDA at 9.3x in FY20, and a five-year average of 8.3x. AAPT lenders benefit from a stronger covenant package, including a debt-service reserve account. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - An upgrade in the near term is unlikely due to the risk associated with refinancing upcoming debt maturities in 2021 and 2022 Factors that could, individually or collectively, lead to negative rating action/downgrade: - Failure to complete debt refinancing well in advance of scheduled maturities - A decline in AAPT's contracted capacity due to customer default or non-renewal of contract - A projected five-year average net debt/EBITDA above 10.0x in Fitch's rating case Best/Worst Case Rating Scenario International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]. TRANSACTION SUMMARY AAPT owns and operates a 50 mtpa coal export terminal under a long-term lease from the Queensland state government that extends to 2110. The terminal is located 25km north of Bowen in northern Queensland, Australia. CREDIT UPDATE Actual coal throughput at AAPT was 32.0 million tonnes in FY20, up from 28.8 million tonnes in the prior year. Revenue of AUD265 million was slightly below AUD268 million in FY19, although the port continued to record additional revenue from short-term contracts. EBITDA in FY20 was broadly in line with the previous year at around AUD180 million. In June 2020, one of the existing users added additional tonnage under their user agreement, with the addition being 1.0 million tonnes for 2020-2021 and 1.5 mtpa from 2021-2022 until the end of the user agreement term. AAPT's next maturity is the AUD170 million bank facility due in November, which has been pre-funded via drawdown under the subordinated shareholder loan. Fitch understands that similar shareholder support would be available to address the US private placement maturity in 2021, if necessary. FINANCIAL ANALYSIS Fitch Cases Fitch's base case assumes average contracted capacity of 43.7 mtpa in FY21-FY25, increasing in the later years as the Adani Mining contract begins. We assume the refinancing margin increases gradually to 300bp beyond FY20. The base case results in a maximum debt/EBITDA of 7.2x in FY21 and minimum interest coverage ratio of 2.0x in FY29. The project life coverage ratio calculated over 25 years is 1.9x. The Fitch rating case assumes average contracted capacity of 38.3 mtpa over the first five years, which is supported by commencement of the Adani Mining contract. The post-2020 refinancing margin is assumed to rise gradually to 400bp. The case also assumes that the base borrowing rate rises gradually to 5%, from 2%. The rating case results in a maximum debt/EBITDA of 7.9x in FY21 and a minimum interest coverage ratio of 1.7x in FY29. The 25-year project life coverage ratio is 1.7x. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations APPT has an ESG Relevance Score of 5 for Management Strategy due to the bullet-amortisation debt structure and its exposure to coal markets. This has a negative impact on the credit profile and is highly relevant to the rating, resulting in the ratings on APPT's bonds being downgraded and placed on Rating Watch Negative in March 2020. Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Adani Abbot Point Terminal Pty Ltd ----Adani Abbot Point Terminal Pty Ltd/Debt/1 LT; Long Term Rating; Affirmed; BB+; Rating Outlook Stable Contacts: Primary Rating Analyst James Hodges, Associate Director +61 2 8256 0377 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Louis Pang, FRM Associate Director +852 2263 9992 Committee Chairperson Sajal Kishore, Senior Director +65 6796 7095 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Infrastructure and Project Finance Rating Criteria (pub. 24 Mar 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10114533) Ports Rating Criteria (pub. 24 Mar 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10114315) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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