Adani Group’s Growing Debt Pile Is Changing Colour
In 2012, in a prescient report titled House of Debt, investment bank Credit Suisse listed 10 over-leveraged corporate groups. Lanco Group, Jaypee Group, GMR Group, Videocon Group, GVK Group, Essar Group, Adani Group, Reliance Group, JSW Group and Vedanta Group. Many of those have since been forced to deleverage via asset sales, some group flagship companies are facing insolvency and only a few have emerged unscathed. Of them one has in fact added to its towering debt pile.
In these seven years, the Gautam-Adani founded Adani Group, with interests in ports, power, gas and other infrastructure, has seen its total debt double from Rs 69,201 crore to Rs 1.28 lakh crore. And while initially the funds came from Indian banks, Adani has in the last couple of years preferred to borrow offshore.
Currently, approximately 30 percent of the group’s debt is foreign currency debt—the goal is 65 percent in the next few years.
As a result, public-sector bank funding for the group is down from 55 percent of the total debt (listed companies) in March 2016 to 42 percent in March this year. While the private bank share has risen marginally, it’s the share of bonds that has close to doubled—from 14 percent to 25 percent. This is on account of issuance of foreign currency bonds. Just this financial year, two group companies— Adani Ports Ltd. and Adani Green Energy Ltd.—have raised $2.26 billion (approximately Rs 16,000 crore) by issuing bonds in foreign markets.
The reasons for this debt diversification are likely many—a slowdown in bank lending in India, a broad reluctance to lend to highly indebted business groups, especially those invested in infrastructure projects susceptible to time and cost overruns, new lending rules that cap local bank exposure to borrower groups, new dynamic loan pricing, and last but not the least: cheaper dollar financing.
With the current group debt, even a one percent change in an Indian bank’s lending rate (MCLR) could cost the group Rs 1,350 crore more in interest per year, said a person close to the group on why Adani has preferred borrowing offshore. In the case of foreign debt, the interest rate is fixed and hedging helps protect against the foreign exchange risk. Fully hedged foreign debt reduces its interest cost by 100 basis points (100 bps = one percentage point), added the person.
The diversification into foreign borrowings also gives the group access to a wider array of investors, especially those willing to lend for longer periods.
For instance, at Adani Ports, the issuance of bonds of over a billion dollars this year helped extend the overall debt maturity from an average four years to six years. Whereas 54 percent of the company’s debt earlier was of one- to three-year maturity, now 65 percent is over five years. And half the total debt is foreign.
At Adani Green, almost all the debt is now long term (average seven years) and 40 percent of it is foreign debt.
Adani Transmission is expected to convert 65 percent of its debt in the next 12 months, said the person cited above. Its debt maturity profile has already improved though—in FY16, 69 percent of its debt had an average maturity of one to three years, now 65 percent of it is more than 5 years.
While Adani Power’s foreign debt has reduced in proportion, from 18 percent in March 2016 to 10 percent at the end of March 2019, the company will begin dollarising its debt in 2020, said the person quoted above.
- Adani Ports foreign debt proportion rose to 73 percent after the recent foreign bonds issue.
Adani Green foreign debt proportion rose to 40 percent after the recent foreign bond issue.
This ability to tap into foreign funds is one reason why Adani Group companies have escaped the local credit squeeze and been able to continue to raise money, whether for growth and expansion or refinance. The other critical reason is that all the listed companies of the group have reported positive cash flow from FY 19 operations.
At Adani Ports, Adani Transmission and Adani Gas, the operational cash flow almost met or exceeded the scheduled debt repayment and interest cost—meaning that the company did not have to borrow afresh to repay old loans. Though, for the other three group companies, the operational cash flow was comparatively lower than the scheduled payments for that year. Adani Power’s debt at Rs 23,314 crore is the highest on account of which the debt-equity ratio is over 5 and the interest coverage ratio bordering at 1.
In its group rating rationale, Brickwork Rating Agency said:
“Overall debt level of the Adani Group has been increasing on account of new initiatives as well inorganic growth undertaken across businesses by the Group. However, at an overall Group level, the debt is adequately covered through committed cash-flows across the strong businesses.
For the equity requirements of new businesses and support requirements for existing businesses, the promoters largely rely on dividends from strong businesses and raising additional funds through pledge of their equity shares in the listed companies. Servicing of some of this debt largely depends on refinancing options.”