Adani credit flashes warnings after group gorged on cheap debt

By Finbarr Flynn, Divya Patil and Archana Narayanan

Gautam Adani’s sprawling corporate empire embraced the era of cheap debt like few others. But with yields spiking and access to overseas financing suddenly in question, investors and analysts say the borrowing blitz has made it all the more vulnerable amid its worst crisis ever.

The conglomerate, with businesses stretching from ports to renewable energy, tapped international bond buyers for more than $8 billion in recent years, while also turning to global banks for at least as much in foreign-currency loans, data compiled by Bloomberg show. After its borrowing costs surged in response to allegations of fraud and stock manipulation by shortseller Hindenburg Research, some are already warning that Adani’s more highly-leveraged companies have little capacity to absorb higher interest rates.

“The group will have to work, over time, to repair some of the damage caused by these issues,” said Abdul Kadir Hussain, head of fixed-income asset management at Dubai-based Arqaam Capital. “Emerging-market credit investors are very sensitive to issues surrounding transparency and governance.”

Adani has hired banks to set up meetings with fixed-income investors beginning Thursday, according to a person familiar with the matter. A spokesperson didn’t respond to a Bloomberg request for comment on whether the group is seeking to sell dollar debt in the near future, or its strategy for refinancing any dollar debt that matures by the end of 2024.

The billionaire himself said in a video this month the track record on debt payments is ‘impeccable.’ In a release this week, the Indian conglomerate said it faced no material refinancing risk or near-term liquidity requirements as there’s no near-term significant debt maturity. The group’s debt service coverage ratio was 2.03 times at the end of September, while its cash balance rose to $3.9 billion as of Dec. 31, it said.

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Attention is shifting toward the Adani Group’s debt pile following a stock rout that’s wiped out more than $120 billion in market value.

Moody’s Investors Service last week cut the outlook on Adani Green Energy Ltd.’s Ba3 rating to negative from stable, noting “significant” refinancing needs of about $2.7 billion in the year ending March 2025, and “limited headroom in its credit metrics to manage any material increase in funding costs.”

That followed revisions to the outlooks of Adani Ports & Special Economic Zone Ltd. and Adani Electricity Mumbai Ltd. by S&P Global Ratings, which warned that “new investigations and negative market sentiment may lead to increased cost of capital and reduce funding access.”

Leonard Law, a senior credit analyst at Lucror Analytics, said that a “severe deterioration” in financing access for one Adani Group entity risks sparking a negative cascade for the entire conglomerate.

“A liquidity crunch at any one of the entities may have a ripple effect on financing access for the wider group,” he wrote in a recent report to clients.

While such fears added to a rout in the group’s bonds after the Hindenburg report late last month, the notes have since pared losses, with many now trading in the 70 cent range. The rebound came after banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. told clients that bonds related to Adani’s business empire offered value in part due to the strength of certain underlying assets.

Still, in a sign of how much funding costs have surged, the yield on Adani Green’s September 2024 bond is indicated at about 24%.

Oaktree Capital Management, one of the world’s largest opportunistic debt firms, and Davidson Kempner Capital Management were among those buying the debt in recent weeks, Bloomberg reported.

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Adani Group companies generate free cash flow, and if necessary the conglomerate can divest assets such as its cement operations to improve its cash position even further, said Chakri Lokapriya, chief investment officer at TCG Asset Management Co. in Mumbai.

Debt surge

Ironically, Adani, a self-made billionaire who describes his meteoric rise in terms of India’s own economic growth, led his group to a growing reliance on a source of funding that the Indian government itself has long avoided: dollar bonds.

India has no outstanding dollar notes, unlike many of its Asian peers including China, Indonesia and South Korea.

Enter Adani Group, which became one of the country’s biggest source of dollar bond issuance, sating demand from global money managers desperate for exposure to the nation’s growth potential.

Businesses tied to ports, power generation, electricity transmission and renewable energy were among the most prolific borrowers, and at least 200 financial institutions around the world — including the likes of BlackRock Inc., the world’s biggest asset manager — have had exposure to Adani Group’s dollar debt, underscoring the stakes for global investors.

Adani Green Energy in particular leaned heavily into debt financing, with gross debt bulging to about 11 times earnings before interest, taxes, depreciation and amortization in the 12 months through September, according to Bloomberg News calculations based on data from the group. That’s more than for any other listed Adani entity.

Debt to Ebitda gives an indication of a business’s ability to generate cash to pay down borrowings. A higher ratio suggests more difficulty in fulfilling obligations.

Gross debt was about 5.8 times Ebitda for Adani Transmission Ltd., and 4.9 times at flagship Adani Enterprises Ltd., data for the same period show. Conversely, combined assets were about 1.9 times net debt for seven of the conglomerate’s key businesses including ports, cement and power, according to Adani figures.

While the group faces minimal maturities this year, it has over $2 billion of bonds and a $4.5 billion bridge loan maturing by the end of next year, according to data compiled by Bloomberg. Adani plans to prepay a $500 million chunk of the loan due next month after some banks balked at refinancing the debt, Bloomberg previously reported.

“The Adani saga is so non-transparent that anything can happen,” said Lutz Roehmeyer, chief investment officer at Berlin-based Capitulum Asset Management. “Governance is important, and more so for family businesses that grow out of nowhere.”