Adani Group Credit Hit: What is a Credit Rating and Why Does it Matter?

Troubles for the Adani Group have been snowballing post the US indictment that charged the conglomerate’s chairman, Gautam Adani and his six associates in a $265 million bribery scheme. The group’s businesses, particularly in power and port, have felt the heat as their deals have come under scrutiny in India and certain neighouring countries like Bangladesh and Sri Lanka. The impact of the US indictment has also affected the Adani Group’s credit ratings, with around three global rating agencies revising their stance on seven companies of the conglomerate. 

Moody’s Ratings changed its outlook on seven Adani Group companies, including Adani Ports and Adani Electricity Mumbai, on Tuesday from ‘stable’ to ‘negative’. It gave a “Ba1” rating to Adani Green Energy Restricted Group 1 and 2. 

“We have changed the outlook on all seven issuers to negative from stable. These rating actions follow the indictment of Adani Green Energy chairman, Gautam Adani and several senior management team members by the US Attorney’s Office...which is likely to weaken Adani Group’s access to funding and increase its capital costs,” said Moody’s. 

Last week, S&P Global downgraded the outlook for certain companies of the Adani Group from stable to negative due to mounting legal and governance risks. Fitch too placed the companies in “Rating Watch Negative” status and rated the firms under the “BBB” category. 

What is a credit rating? 

Credit rating is an assessment of the ability of a company or a government to repay loans. It helps lenders examine whether a company will be able to pay back its loans or not. 

Rating agencies study the financial history of a company including borrowing and repaying loans, bankruptcies or defaults, and cash flows and debt levels, in order to calculate the credit rating of a company or government. 

If the company has stable revenue and its prospects appear good, the credit rating will be higher, while if there is any uncertainty around the borrower’s financial outlook, the credit rating will fall. It shows the financial strength and weakness of a company to fulfill its commitments when it borrows money. The rating scale ranges from AAA, AA, A, BBB, BB, B CCC, CC, C, and D for default. Certain credit agencies add + or – to the letters instead of repeating the letters. AAA is the highest credit quality. 

How does it affect a company? 

While for lenders, credit ratings make it easier to judge the potential of a company to repay, for companies it becomes easier to get loans at a lower interest rate if their ratings are on a higher level. It is a financial report card of a company; the higher the ratings are, the easier it is for the company to get loans. Moreover, the better credit rating a company has, the easier it is to offer less interest rates on its bond as investors will be confident. However, if its credit rating is bad, the company will have to offer more interest rate on bonds, which it uses to raise funds. 

In June last year, Shapoorji Pallonji’s Goswami Infratech issued the zero-coupon bonds at a yield of 18.75 per cent for a period of two years and ten months following the ‘BBB’ credit rating by CareEdge Ratings given to the bond issue, according to Business Standard.

Currently, as nearly three global agencies have downgraded credit ratings for the Adani Group’s companies, it will increase their difficulties borrowing loans, especially from international financial institutions. Moody’s, in its report said that the rating for the conglomerate’s firm will shift to stable if the legal proceedings against the Adani Group conclude with no negative impact. On the other hand, if the governance-related issues continue, Moody’s will further downgrade its ratings. 

“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 cannot address or rectify governance issues associated with the ongoing legal proceedings,” said the agency.