(Bloomberg) — The fallout for Gautam Adani’s empire from a short seller’s fraud allegations is worsening, with a relentless equity rout forcing the Indian billionaire to pull a record share offering and consider a review of his capital market strategy.
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Adani Enterprises Ltd. slumped as much as 15% before paring the loss, adding to the 28% decline on Wednesday that prompted it to abandon a $2.4 billion follow-on share sale. Most of the other nine stocks in the group, which spans from ports to energy, also fell, while some bonds are now in distressed territory.
The meltdown has wiped out $103 billion in the group’s market value since US short seller Hindenburg Research said the conglomerate used a web of companies to inflate revenue and stock price. The question now is what Adani will do to prevent the turmoil from getting out of control, as banks demand more collateral or assign zero lending value to its securities for margin loans.
“The biggest risk is if Adani Group faces a severe deterioration in access to financing, particularly at its highly leveraged entities,” Leonard Law, a senior credit analyst at Lucror Analytics, wrote in a note. “This is as a liquidity crunch at any one of the entities may have a ripple effect on financing access for the wider group. That said, the group can likely continue to raise funds from onshore banks and bonds for now.”
Citigroup Inc.’s wealth arm stopped accepting securities issued by Adani companies as collateral for margin loans after “negative news around the group’s financial health” led to a dramatic price drop, according to an internal memo. Credit Suisse Group AG’s private banking unit had also made a similar change for the bonds.
In a sign of growing official concern, the Reserve Bank of India is said to have asked lenders for details of their exposure to the Adani group.
Adani Responds
Hindenburg Research last week accused the Adani group of “brazen” market manipulation and accounting fraud, setting off an intense selloff in the stocks. Adani has repeatedly denied the allegations, called the report “bogus,” and threatened legal action.
Adani Enterprises’ decision to withdraw its follow-on share sale — the largest cancellation in Asia since 2015 based on Bloomberg-compiled data — won’t have any impact on existing operations and future plans, Adani said in a video speech Thursday.
“The fundamentals of our company are strong. Our balance sheet is healthy and assets, robust. Once the market stabilizes, we will review our capital market strategy,” he said.
Eyes are also on what the government of Prime Minister Narendra Modi, widely perceived to have close ties to Adani, might do to help ease the group’s dire straits given the latter’s importance to the nation’s economy. Hindenburg’s report has also raised questions over India’s corporate governance, while the group has labeled the report an attack on the country itself.
The rout is dragging down the broader market. The MSCI India Index, which includes eight of the group’s stocks, is down about 9% from a December peak and inching closer to a technical correction. Eight of the 10 worst-performing stocks in the MSCI Asia Pacific Index this year are Adani-linked companies.
“One has to be very watchful and investors would be well advised not to tinker with Adani stocks till there is clarity on the way forward,” said Alok Churiwala, managing director of Churiwala Securities Pvt. “The stocks may recoup some of the losses but to come back to past levels, it’s going to be tough because they are going to be scrutinized even more.”
Debt Woes
Hindenburg has said it has short positions in Adani’s US-traded bonds, some of which saw the biggest decline in global secondary trading on Wednesday.
Two of the dollar bonds issued by Adani Ports and Special Economic Zone Ltd., maturing in 2027 and 2029, have both lost nearly 20% since Hindenburg released its report, according to Bloomberg-compiled data. Adani Green Energy Ltd.’s Sept. 2024 note has plummeted nearly 30%.
Adani Group has $34.7 million of coupon payments due this week on its dollar bonds.
Hindenburg says key Adani companies are highly leveraged relative to the industry average, and that four of them have negative free cash flow, including the flagship. In Adani’s rebuttal, it said the group’s net debt to EBITDA ratio dropped to 3.2 times as of March 2022, from 7.6 times in 2013. It also stated that the leverage ratio is in line with industry benchmarks.
Looking at valuations, “there could be more downside to the Adani group shares,” said Nitin Chanduka, an analyst at Bloomberg Intelligence. “Banks could take a knock in case foreign outflows intensify and there is a default on bonds but so far they haven’t missed interest payments.”
–With assistance from Abhishek Vishnoi, Matt Turner, Josyana Joshua, Filipe Pacheco and P R Sanjai.
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