Ratings agency Moody's said on Tuesday that it has cut the outlook on the ratings of seven Adani entities to 'negative' from 'stable', citing the US indictment of chairman Gautam Adani and others on alleged bribery charges, while Fitch Ratings put some bonds of the conglomerate on negative watch.
Moody's affirmed the ratings on all seven entities -- Adani Ports and Special Economic Zone Ltd, two limited restricted groups of Adani Green Energy Ltd, Adani Transmission Step-One Ltd, Adani Transportation Restricted group 1 (AESL RG1), Adani Electricity Mumbai Ltd and Adani International Container Terminal Pvt Ltd.
"These rating actions follow the indictment of Adani Green Energy Ltd's (AGEL) chairman Gautam Adani and several senior management team members by the US Attorney's Office in a criminal case and the filing of charges by the US Securities and Exchange Commission (SEC) in a civil case," Moody's said.
The charges and allegations include bribery of Indian government officials, securities and wire fraud; conspiracy to violate the US Foreign Corrupt Practices Act and obstruct justice; false statements made in annual reports, and false statements made to the US government in relation to its investigation into the group.
"The change in the outlook on the seven Adani entities to negative considers the indictment of Adani and other senior Adani executives on bribery and other charges, which will likely weaken Adani Group's access to funding and increase its capital costs," it said.
The rating action, Moody's said, recognises the possibility of broader weaknesses in the governance structure across the rated Adani group entities as well as potential operational disruptions, including on their capital spending plans, while legal proceedings are going.
"Although the allegations and the charges made by US Attorney's Office and SEC pertain to AGEL's chairman and senior management team members, we believe they could have a broader credit impact on all rated Adani Group issuers, given Gautam Adani's prominent role as chairman of each of the rated entities or their parent companies as well as the controlling shareholder," it said.
The project finance entities of the group are not exposed to refinancing risk and do not require any substantial capital investment, it said, adding that they remain exposed to the potential governance weakness and the risks that could arise from any negative findings in the ongoing legal proceedings.
Stating that an upgrade of the ratings is unlikely in the near term, given the negative outlook on all seven issuers, Moody's said it could change the rating outlooks to stable if legal proceedings conclude clearly with no material negative credit impact.
"A stable outlook will also be predicated on the group maintaining appropriate financial metrics for the respective ratings, demonstrating its retained access to funding to meet growth initiatives and refinancing requirements, and strengthening its governance practices across the group entities," it added.
"We could downgrade the ratings of the group entities if the legal proceedings lead to a material disruption to their operations or access to capital.
"A downgrade is also likely if the group is unable to address or rectify governance issues associated with the ongoing legal proceedings."
Separately, Fitch placed ratings on Adani Energy and Adani Electricity Mumbai on negative watch list following the bribery charges and indictment of certain board members of Adani Green Energy Limited (AGEL) by the US Securities and Exchange Commission and Department of Justice.
This, it said, "reflects increased corporate governance risk and potential contagion risk that could affect the funding access and liquidity.
"While the US indictment mainly involves AGEL's key leadership, the proceedings and the outcome could reflect significantly weaker corporate governance practices of the group and lead to negative rating actions.
"Two of the indicted board members belong to the founding shareholders of Adani group, and one of them is a trustee and beneficiary in the SB Adani Family Trust, which effectively owns a majority of shares in both AESL and AEML," it said.
Fitch said it will monitor the investigations for any impact on the financial flexibility of the rated entities, particularly any material deterioration in near- to medium-term funding access, including their ability to roll over existing credit lines or access new facilities, as well as potentially higher credit spreads.
The rating agency expected the near-term liquidity of AESL and AEML to be sufficient, as there are no significant scheduled debt maturities in the next 12-18 months.
They also have some flexibility in capex plans.
"We believe the latest developments could hamper the group's funding access.
"This can significantly affect the growth plans of AESL, though there is some flexibility in its capex plans.
"Increased reliance on onshore funding could heighten refinancing risk over the medium term, and a material rise in borrowing costs could reduce operating cash flow generation," it said.
"The impact of a material deterioration in the group's funding access is likely to be limited for AEML, as regulations allow for pass-through of operating and interest costs, limiting the impact on the credit profile even in the event of rising borrowing costs," it said.
