Adani may have to face refinance litmus test

Adani Group to refinance $3.8 billion loans

The Adani group is reportedly in talks with major global banks to refinance its $3.8 billion loan facility. Some of the banks that Adani is reportedly negotiating with include Barclays, Deutsche Bank, Standard Chartered Bank and Mitsubishi UFJ Bank of Japan. These loans were taken by Adani to bankroll its acquisition of Ambuja Cements and ACC last year. Through that acquisition, Adani group had become the second largest cement player in India, with nearly 75 million tonnes per annum of cement capacity, second only to Ultratech of the Birla group. These loans were used to buy the Ambuja stake from Holcim and later make an open offer to the minority shareholders of ACC and Ambuja.

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What does the refinancing entail

While granular details are awaited, the reports coming in suggest that Adani group is negotiating a longer tenure for the loans and may even be willing to pay a higher interest rate on such loans. This could also be because the cost of funds for Adani group would have gone up for two reasons. Firstly, the cost of funds generally has gone up across the world with central banks getting increasingly hawkish. Secondly, post the Hindenburg report, there have been questions over the ability of the group to raise big-ticket financing from global banks at competitive rates of interest. That should be evident in the days to come, but first a look at what the Hindenburg saga was all about.

The Hindenburg saga and impact on Adani Group

In late January 2023, short seller, Hindenburg Research, had issued a rather scathing report about the functioning of the Adani group of companies. Broadly, there were two allegations in the report. The first allegation was that most of the foreign investments shown by the Adani group were, in reality, fictitious transactions that were Indian funds routed back into India as foreign investment. The second allegation was that the Adani group had too much capital tied up in long-term assets and it just did not have the cash flows to service the billions of dollars of debt that the group companies had taken.

The impact was immediate and severe. The value of Adani group stocks lost more than $120 billion in market capitalization in less than a month. Adani group stocks have since bounced back but are still far away from the valuations enjoyed by the group in late 2022. The sharp fall in the value of the stocks not only led to panic among investors but also forced the group to cancel its Rs20,000 crore FPO. In addition, margin calls were triggered, which worsened the crisis. Things now appear to be relatively under control.

Will refinancing of debt really be an issue?

While it may not be an issue, it will certainly be a challenge. To the credit of the Adani group, they have moved really fast. In the last few months, they have prepaid billions of dollars in loans to give confidence to the markets. That shows that the company still has access to cash. This released a lot of promoter shares and reduced the risk for the company. But the latest refinancing of the $3.8 billion credit line will be crucial for two reasons. Firstly, it will test if the banks are still willing to repose faith in the group. Secondly, it will show how much the crisis has affected its funding costs.

In the last few months, the Adani group has put most of its large capex plans either on hold, or it has pared the size. Clearly, Adani is not going to play second fiddle in an economy that it wants to dominate. For that, an unfettered flow of funds will be mandatory. That is what is going to get tested to the hilt when the Adani group approaches the banks for its $3.8 billion refinancing.

Content Source: Financial Express