Adani to slow capex, deleverage

Published 17 February 2023, 14:00:46

MUMBAI, Feb 17 (IFR) - Adani Group attempted to comfort fixed income investors on Thursday when it announced a focus on deleveraging and a slowdown of capital expenditure, a move that pushed the prices of the US dollar bonds of its units higher.

Jugeshinder Singh, group CFO, said on an investor call that the Indian conglomerate will limit all capex-related commitments for the next 12–18 months until the company weathers its current storm, according to people who attended the call. As a result, it has allowed the plans for Adani Power to acquire thermal power producer DB Power for Rs70.17bn (US$847m) to lapse, he said.

Market participants welcomed the comments, which came after a stock rout erased more than US$120bn in market capitalisation in the wake of short-seller Hindenburg Research's negative report on January 24.

"They are taking a few steps back and assessing the big picture for the group and its units. The capex cut announcements will help in deploying the cashflows in repayment of near-term debt which is seen as a palatable move by investors," said Anish Teli, managing partner at QED Capital Advisors, a portfolio management services firm. 

Adani's Singh said the group will focus on deleveraging as it aims to reduce its consolidated net debt to Ebitda to below 3x by the end of the next fiscal year ending March 2024. Net debt to Ebitda is estimated to be 3.2x by the end of March 2023, according to a credit note Adani Group released on February 14.

Singh said that the group will repay all its remaining share-backed loans in the next 20 days to remove any overhang related to sponsors having borrowed capital. It repaid a US$1.11bn loan against shares earlier this month, and a rating analyst estimated it still has a further US$700m outstanding.

Refinancing plans

Singh tried to address investor concerns about highly leveraged entities like Adani Green Energy by outlining possible refinancing strategies. He said Adani Green Energy Restricted Group 1's US$500m 6.25% notes due December 10 2024 might be refinanced with 15-year fully amortising notes sold via a private placement, and is hoping to have a 100% cash-backed facility or underwritten finance plan ready by June 30 to refinance Adani Green's US$750m 4.375% holdco notes, which are maturing on September 8 2024.

The management said the focus of Adani Group will be to use operating or internal cashflows to take care of debt repayments for the next 12 months at most of its units. For example, Adani Ports and Special Economic Zone has already announced the repayment of US$605m of loans as it plans to halve capex starting in the fiscal year beginning on April 1.

The US dollar bonds of Adani units rallied following the investor call.

Adani Green Energy’s 4.375% 2024 holdco notes jumped 10 points to 85 cents to yield 15.65% and the 6.25% 2024s of Adani Green Energy (Restricted Group 1) surged six points to 96 cents to yield 8.69%, according to Refinitiv data. Adani Ports' US$650m 3.375% notes due July 24 2024 recovered to 93.75 cents from 90.63 cents to yield 8.1%.

"It is positive that Adani Green is seeking refinancing options well ahead of maturity, as it signals to the market that the company is committed towards meeting debt repayments," said Leonard Law, a senior credit analyst at Lucror Analytics, though he questioned whether it could put financing in place by June.

But some bond investors remained cautious. “Adani Group needs to show evidence of access to financial markets – equity or debt – to regain investor confidence," said a head of credit at an investment management firm based in Singapore.

Credit note

The investor call came after Adani Group said that it faces "no material refinancing risk and near-term liquidity requirement" in its credit note, which included a compendium of the consolidated nine-month results of its eight portfolio companies: Adani Ports, Adani Green Energy, Adani Transmission, Adani Total Gas, Adani Power, Adani Enterprises, Ambuja Cements and ACC. Their combined net debt was Rs1.963trn as of end-September, with cash and cash equivalents of Rs297.5bn.

Adani said this cash balance had risen to Rs316.5bn as of end-December, but did not provide the corresponding debt figure. However, it expects net debt to decrease slightly to Rs1.956trn by end-March.

The debt service coverage ratio is estimated at 1.87x as of end-March compared to 2.03x as of end-September.

“The credit note shows that there is continuous business income, and they have cashflows in place to pay off the liabilities for most of their businesses like ports, electricity and transmission," said Suresh Parmar, institutional head of equities at KJMC Capital Markets.

However, some analysts remain concerned about near-term repayments, especially at flagship incubator company Adani Enterprises. "The moment the company rescinded the Rs200bn FPO [follow-on public offering], bridging the short-term funding gap has become an issue, as operational cashflows may be insufficient and there is no room for additional short-term borrowing," said Hemindra Hazari, an independent research analyst, who estimates the liquidity shortfall, defined as short-term borrowing power minus total short-term borrowing, at Rs130bn as of last September. Adani Enterprises was going to use Rs41.65bn from the follow-on, which was called off earlier this month, to repay debt.

Adani Enterprises' debt service coverage ratio is estimated at 2.2x for the current fiscal year, with cashflow from assets at Rs70.9bn, and Rs32.3bn assigned for debt servicing, according to the credit note.

Governance concerns will remain an overhang. S&P placed its ESG evaluation, of 63 out of 100, for Adani Transmission under review over such concerns on February 16. The rating agency said it will closely monitor any investigations by Indian regulators and any additional disclosures by the group.

During the investor call, Singh said Adani will conduct an audit review process as a "sanity check" across various entities before June 30, in line with its regular practice.

By Krishna Merchant