Adani’s bonds are a soft target with hard assets

By Andy Mukherjee

The journey of Gautam Adani, a small-time importer of plastics granules into India in the 1980s, had begun along the coast of Gujarat — in a swamp he would go on to turn into the country’s largest trading outpost. And now, with his fortune back home under attack from a New York-based short seller, the tycoon posed for cameras with Benjamin Netanyahu in the Haifa Port, which he had come to buy for $1.2 billion (Rs 9,894 crore).

To bondholders, there’s a symbolism in the beleaguered billionaire’s Jan. 31 photo-op with the Israeli prime minister. The ambition that had propelled his odyssey from the Gulf of Kutch 25 years earlier was intact as he stood on the edges of the Mediterranean. But did he still have the ability to keep it all together?

Also Read: In Hindenburg's masterclass, Adani flunks

When debt investors ask such existential questions, they tend to take a more nuanced view than their equity counterparts. On the one hand, a sudden wipeout of more than $100 billion (Rs 8.24 lakh crore) in stock-market wealth will have some impact on the creditworthiness of an empire with $20 billion (Rs 1.64 lakh crore) in net debt, or three times full-year Ebitda. On the other hand, the conglomerate controls ports, airports, power plants, coal mines, solar farms, roads, electricity and gas distribution, cement factories, edible-oil refineries, grain silos, and even India’s largest supply chain for apples. These are all hard assets, powered by the beating heart of the behemoth: the Mundra port in Gujarat, the home state of both Adani and Indian Prime Minister Narendra Modi. The two men are said to be close, even though the businessman denies seeking or receiving political favors.

The group has also rejected Hindenburg Research’s allegations of market manipulation and accounting fraud as baseless. While their impact on investor sentiment lingers, Adani could perhaps use internal cash generation to keep going. Short-term refinancing needs are modest; the next dollar bond maturity is in June 2024.

To know whether Adani is more likely to float than sink, bondholders are turning to rating companies, advisers and lawyers. There is no immediate impact on rated Adani entities’ credit profile from the short seller’s report, Fitch Ratings said Friday, adding that it expects no material changes to the group’s forecast cash flow. Moody’s Investors Service sidestepped the question of whether it may change its assessment. However, the ongoing “adverse developments,” it said, “are likely to reduce the group’s ability to raise capital” to fund committed capital expenditure or refinance maturing debt over the next one to two years.

S&P Global Inc. went the farthest by slashing its outlook on two of Adani’s dollar bonds to negative. (The rating, though, continues to be BBB minus, the last rung of investment grade.) One of these two notes happens to be debt issued by Adani Ports & Special Economic Zone Ltd., the same company that is going to modernize the terminal at Haifa.

In many ways, Adani Ports embodies the bondholders’ predicament. Here’s a business in a tearing hurry. In the past couple of years, it has bought three Indian seaports by spending $2.6 billion (Rs 21,31 crore). It wants to set up another on India’s eastern coast, and potentially acquire the state-run railway logistics firm Container Corp. of India, CreditSights, a Fitch Group unit, said in a report in August.

To show that bonds of this strong but acquisitive franchise don’t deserve to be cut to junk or trade in distressed territory, Adani must demonstrate that the cash from ports won’t be funneled to other corners of his realm via “significant related-party transactions outside the normal course of business,” as S&P puts it. He also needs to stitch up the financing for expansion.

Also Read: Hindenburg’s questions on Adani need an impartial reflection

But with Bloomberg News reporting over the weekend that Adani Enterprises Ltd., the flagship, has decided to cancel a Rs 1,000 crore bond issue — its first public sale of debt in the local market — the ability to tap more demanding overseas investors is rather low at the moment. The infrastructure czar may not go ahead with a planned $500 million (Rs 4,121 crore) bond offer abroad to refinance some of the $4.5 billion (Rs 37,100 crore) debt he took last year to buy Holcim Ltd.’s cement business in India, the Economic Times has reported.

Ultimately, bondholders will do what they can afford to. The political and regulatory temperatures around the saga have risen, with India’s opposition parties noisily demanding a parliamentary discussion, the central bank seeking to calm nerves around local lenders’ exposure and questions being asked of India’s Life Insurance Corp. and France’s TotalEnergies SE for their entanglement in the equity of the highly leveraged conglomerate. The governance risk is now too great for credit desks at large Wall Street institutions to ignore, lest their own bosses freak out over a scandal showing no sign of abating. Although Adani has given a 413-page rebuttal to Hindenburg’s allegations, international media is now independently reporting on them.

Wealthy individuals may be drawn to attractive yields. But for them to obtain financing from private banks has become challenging. That leaves hedge funds as the potential knife-catchers. Perhaps the group itself will call back some notes to shore up confidence. Or Adani could consider selling a few assets to demonstrate how good they are. But that latter decision won’t just be about financial ability. The former centi-billionaire has lost nearly half his personal wealth over six days, but has he also lost half his ambition? By showing up in Haifa on what was possibly one of the most anxious days of his life — he was kidnapped for ransom in 1998 and holed up a Mumbai hotel during a lethal November 2008 terrorist attack — he seems to be signaling the opposite.

($1 = Rs 82.42)