Gautam Adani’s woes were in banks' plain sight

HONG KONG, Feb 8 (Reuters Breakingviews) - Gautam Adani’s recent woes have vindicated persistent doubts in India about the tycoon’s rise. With his eponymous group’s bonds trading at distressed levels, big international banks which bankrolled the 60-year-old’s debt-fuelled ascent face increasingly awkward questions about how they assessed the risk.

For lenders including Deutsche Bank (DBKGn.DE), Barclays (BARC.L) and Standard Chartered (STAN.L), (2888.HK) the over $110 billion slump in the value of Adani’s seven core listed companies, triggered by last month’s critical report from short-seller Hindenburg Research, should not have come as a surprise. The warning signs were hiding in plain sight.

Before the U.S. fund launched its attack, the combined market value of Adani’s companies had increased seven-fold in three years to $218 billion, a rapid rise that made him synonymous with India’s growth ambitions. The university dropout-turned-first generation entrepreneur owns the largest national portfolio of renewable energy assets, seven of the country’s airports including Mumbai International, and operates a quasi-duopoly - alongside the state - in ports and power transmission.

Valuations were sky-high too. Before the selloff, three of Adani’s listed firms were among the world’s top 10 most expensive large companies based on multiples of expected earnings for the next 12 months, briefly making him the third richest man on the planet. Adani Enterprises (ADEL.NS), the group’s coal-miner-cum-incubator for new projects from roads to data centres, was valued at 136 times.

Hindenburg, which is run by Nathan Anderson, accuses Adani of pulling the “largest con in corporate history” by using offshore tax havens to enact fraud and manipulate stock markets. The Indian group dismisses those claims as a “malicious combination of selective misinformation and stale, baseless and discredited allegations”. That these allegations are not entirely new is what now puts Adani’s bankers in an awkward position.

The recent rout is a supersized version of a 2021 selloff in Adani stocks triggered by a media report which implied opaque Mauritius-based funds had puffed up the value of the tycoon’s companies. At the time, Adani said the story was “blatantly erroneous”. Yet the furore is why many investors avoided the group, even though its combined 5% weight in the MSCI India Index meant cautious money managers underperformed the benchmark. By contrast, other big Indian groups like Mukesh Ambani’s Reliance Industries (DBKGn.DE) and those carrying the Tata name are more popular with institutional investors.

Tepid interest from brokerages was another red flag. When Breakingviews looked closely at the group in August 2022, data provider Refinitiv displayed no earnings estimates on its portal for three Adani companies with a total market value of over $100 billion.

Fee-hungry international banks were much less picky. They deepened their relationship with the tycoon, helping him diversify his funding sources and reduce his dependence on Indian lenders. Foreign banks and bonds now account for 18% and 37% of Adani group’s borrowings, respectively, up from zero and 14% six years ago, according to Jefferies analysts. Deutsche, Barclays and StanChart pocketed $57 million of the $260 million of investment banking revenue generated by the Adani group since Dealogic records began. The trio rank alongside State Bank of India (SBI.NS) and domestic private lender ICICI Bank (ICBK.NS) as the top five fee-earners. Citi (C.N) has been a top adviser on Adani’s debt capital markets deals since 2014. Forced onto the defensive, the Adani group now points to those international bank relationships as a sign of its strength.

Foreign banks are keeping quiet about their exposure, but they had some justification for taking the plunge. The Securities and Exchange Board of India continued to approve all the group’s proposals even though a government minister’s written reply, disclosed in parliament in 2021, revealed that the regulator was investigating some Adani group companies. Adani’s rise during Prime Minister Narendra Modi’s premiership, and the fact the tycoon was building things India needs, may have convinced banks that he enjoyed implicit state support.

Meanwhile, Adani’s links with international strategic investors offered an additional source of comfort. Since 2019 the tycoon’s companies have secured billions of dollars of equity funding from France’s TotalEnergies (TTEF.PA) and Abu Dhabi’s International Holding Company (IHC.AD), a conglomerate chaired by the United Arab Emirates’ powerful Sheikh Tahnoon bin Zayed Al Nahyan.

What’s more, Adani was buying mostly cash-generative assets. Last year’s $10 billion acquisition of the Indian cement business of Switzerland’s Holcim (HOLN.S) was financed by about $5 billion of loans underwritten by Barclays, Deutsche and StanChart. Others in the syndicate include Singapore’s DBS (DBSM.SI), Japan’s Mitsubishi UFJ Financial Group and Italy’s Intesa Sanpaolo (ISP.MI). The Holcim loans are fully secured by companies that have little debt, according to a person familiar with the situation. And while the Adani group’s borrowings rose about 40% to reach $27 billion in the year to March, its net debt seems manageable at four times EBITDA. Throw it all together, and the rewards from banking Adani seemed to justify the risks.

Yet foreign banks are now distancing themselves from the group. Many have either halted borrowing against Adani’s U.S. dollar bonds or stopped offering loans against the group’s securities. India’s regulator and credit ratings agencies are stirring too. SEBI is looking at possible irregularities around Adani Enterprises' aborted $2.4 billion share sale, Reuters reported last week. Meanwhile, S&P has turned negative on the outlook for two issuers: Adani Ports' (APSE.NS) dollar bonds trade at between 66 and 90 cents on the dollar. The rating agency says debt maturities in the next 12 months are manageable but admits investor concern about the group’s governance may be larger than it had considered. In a move that helped calm the market, Gautam Adani this week paid over $1 billion to release pledges on some of his shares, and his companies are laying out plans to make debt repayments.

Banks have a history of getting sucked into lucrative looking relationships which then go wrong. The scandal at Malaysia’s sovereign fund 1MDB, which took place a decade ago, boiled down to the failure of financial houses like Goldman Sachs (GS.N) to differentiate between business they can and should do. It ended up costing the Wall Street firm almost $6 billion.

Anyone who did a bit of due diligence on Adani knew that reputational concerns could hinder the company’s ability to rally external support if its access to capital was ever in doubt. Meanwhile, the downside from the banks’ entanglement with Adani continues to rise. On Tuesday, opposition politicians demanding a probe into the group disrupted India’s parliament for a fourth day. Domestic lenders are downplaying the risk of default, but foreign banks look less comfortable with the man whose rise they helped finance. The question of why they were doing his business will only grow louder.

Follow @ugalani on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to fix dateline.)

CONTEXT NEWS

Adani Ports and Special Economic Zone, part of the embattled Indian Adani group, said on Feb. 7 that it expects to repay loans, including bonds, worth 50 billion rupees ($604 million) in the next financial year starting in April.

On Feb. 6, the Adani group said shares related to some of its companies will be released following the pre-payment of $1.11 billion of loans ahead of their maturity in 2024 while denying media reports that said the conglomerate was planning to cut back its capital spending.

Adani on Jan. 29 published a 413-page response to U.S. short-seller Hindenburg Research’s report, which alleged the Indian group was “pulling the largest con in corporate history” including “brazen stock manipulation and accounting fraud”.

In its response, the Adani group noted that over three quarters of the 88 questions Hindenburg posed relate to previously disclosed matters, and that the bulk of the remaining questions relate to public shareholders, for which listed companies are not required to have information. Adani added the short-selling campaign was a calculated attack on India and its growth ambition.

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