Now it seems the above analysis is not right. Things are going out of control. A series of analysis by Basant Maheshwari ji can be found here:
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There may be a grain of truth in it, but at least in this case there was no smoke without fire.
India Rising hits a Roadblock: The Short Selling Threat to the Adani Group!
Prof. Aswath Damodaran on Adani happenings…
Associated blog post - Musings on Markets: Control, Complexity and Politics: Deconstructing the Adani Affair! (aswathdamodaran.blogspot.com)
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An account of the Adani saga: Credit Suisse stops accepting bonds as collateral, Adani prepays some loans, SBI gets more pledged shares
Borrowing and lending are at the heart of investing. An investor might buy a company bond (that is, lend the company money) and then take that bond and use it as collateral to borrow from a bank. Maybe the company’s paying you 7% interest and the bank’s charging you 6%, so you make a neat 1% profit without technically spending your own cash. [1]
Also at the heart of investing is risk. If a company’s paying you a higher-than-usual interest, there’s likely to be a higher-than-usual risk. You might be OK with this risk, but sometimes the bank that’s lending money to you might not be.
That’s exactly what happened when Credit Suisse stopped accepting Adani bonds as collateral about 10 days ago. Since then, so have two others, Citibank and Standard Chartered.
Last October in Adani really likes loans, I wrote:
If you’re a lender to a company, you don’t really care where the money that’s repaid to you comes from as long as you’re paid back. If you buy a company bond, you don’t have to bet that the company will succeed; only that the company survives long enough to pay you back. The money might come from the company’s business (it isn’t), from the owner’s personal fortune, or hell, even from the most recent lender.
Lending to a company that doesn’t generate enough cash by itself is just the finance version of ‘pass the parcel’. Till someone continues to lend, it’s fine. But when the music stops, you don’t want to be the one left holding the parcel.
Credit Suisse is extremely aware of this game of pass the parcel. It’s a veteran. A year-and-half back, the bank lost $5.5 billion at exactly this game!
Very briefly, this is what happened [2] : Credit Suisse and other banks like Goldman Sachs lent money to a hedge fund to buy some stocks. The hedge fund bought a ton of stock, and the price of the stock went up. So Credit Suisse and the other banks lent the hedge fund even more money to buy more stock, and kept some of the stock as collateral. This was fine for as long as the price of the stock kept going up. But then the price of the stock started going down. Some smart banks—including Goldman—were quick and sold the stock they held as collateral. Credit Suisse was slow and was left holding the parcel and got caught with a $5.5 billion loss.
Well, this time around Credit Suisse was quick! This really says more about Credit Suisse than it does about Adani. After all, banks like Goldman Sachs and JP Morgan are happy to sell Adani bonds to their clients, presumably they’re still lending against them. Credit Suisse would rather sit this one out.
Adani needs to repay Barclays
Banks had lent money to Adani against his companies’ stock. The stock prices fell. So the banks asked Adani to post more collateral. Here’s the Financial Times:
The lenders of the $1.1bn loan, which included Barclays, Citigroup and Deutsche Bank, requested last week that the billionaire top up the amount of stock pledged against the loan after a sharp fall in the shares of the listed Adani companies, according to the people with knowledge of the matter.
Since the allegations were published on January 24, the sell-off in the listed businesses had at one point knocked Rs9.4tn ($114bn), or about 50 per cent, off their value.
As the shares continued to slide, Barclays informed Adani of a margin call equivalent to 50 per cent of the loan in cash, said the people, who spoke on condition of anonymity.
Rather than post cash against the loan, which did not mature until September 2024, the Adani Group’s founder and his family opted to repay it completely. Adani has not disclosed the source of the funds used to repay the loan.
Barclays asked not just for more stock but for half the cash they lent out! So… Adani decided to just prepay the whole $1.1 billion?!
When a bank lends you money but then asks for some of it back, it wouldn’t usually expect you to just waltz in and pay it all back at once. This is an unexpected financial cost for you, after all. You might have to sell some of your assets, maybe renegotiate the terms a bit so that you don’t have to do a fire sale. Sometimes companies aren’t able to pay at all and they go bankrupt. It’s tough!
Two weeks ago, Adani was out in the market trying to raise ₹20,000 crore ($2.5 billion) from investors. Some of it was to pay back his companies’ loans. Today, he paid back $1.1 billion when he didn’t even need to. I’d love to know where this money came from.
Adani doesn’t need to repay SBI
When Adani stocks first started falling, right after Hindenburg published its report, people were worried about banks that had given loans to Adani against his company stock. Here’s State Bank of India (SBI) chairman Dinesh Khara from less than two weeks ago:
SBI chairman Dinesh Khara said the bank does not envisage the embattled ports-to-mining group facing any challenge to service its debt obligations and stressed that SBI has not given any loans against shares to the group.
Khara said that SBI didn’t lend to Adani Group with Adani company shares as collateral. So it didn’t matter to the bank if the stock prices went down.
Here’s a disclosure, and another disclosure, and yet another disclosure from earlier this week filed by SBICAP Trustee (a subsidiary of SBI), saying that they’re holding shares of three different Adani companies as collateral on behalf of SBI. It did, after all, matter to SBI if Adani shares went down.
But really, the SBI chairman misrepresenting the situation isn’t the biggest concern here. In Adani really likes loans), I wrote about why banks like lending against shares:
The good thing about keeping your shares as collateral instead of, say, your house is that if your stock price goes up, you can then then ask the bank to keep fewer shares as collateral. Unlike a house, where if its market value went up, the bank wouldn’t be OK with just your bedroom. (It would make perfect financial sense to do that, mind you, just not practical sense. Try selling a bedroom without the rest of the house.)
If you’re a bank, the whole purpose of holding shares as collateral for a loan is that you can sell those shares easily, if you really had to. Two of the companies that SBI just took on more shares of, Adani Transmission and Adani Green, are hitting lower circuits nearly everyday [3], which means that there are too many people trying to sell the shares with no one willing to buy.
When Barclays was worried about its loans to Adani, what it did was ask for cash. What it didn’t do was ask for more stock. Because what would it do with the shares of a company that it couldn’t sell? SBI, though, seems happy to have stock it can’t sell.
Footnotes
[1] Apart from this simple view of collecting the “spread” between your bond coupon and your loan interest, you might also buy a long-term bond and then need some cash along the way. Instead of selling your bond at a discount, you can just use it as collateral and borrow some short-term cash from a bank.
[2] If you’d like to go deeper into this, Matt Levine, of course, has the best account of the episode. Here.
[3] “Lower circuits” and “upper circuits” are stock market protection mechanisms where the exchange temporarily halts trading if the price of a certain share either goes above or below a certain pre-decided threshold. If a stock hits “lower circuit” (generally around 5 to 10% below the opening price), it means that the share price of that stock has fallen as far as it could, and the exchange can’t allow it to fall any further for that day. So, as a seller, you can’t sell any more stock.
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Post about GQG Partners investing in Adani stocks
An investor’s main job is to disagree with everyone else. You buy a stock if you think the price is low, and sell it if you think it’s high. When you’re buying, you think the stock price is low and will go up, but you’re buying it from someone who thinks the opposite. Similarly, you sell a stock when you think the price is high, but the investor on the other side thinks otherwise. There’s quite a bit of disagreement!
Yes, I’m oversimplifying. There are lots of folks in the markets. Some might be gambling. Others might buy a stock even if they think it’s expensive, because they think there’ll be a greater fool who they can sell it to later at an ever higher price. That said, it’s useful to think of an investor as someone seeking to be contrarian. They want to disagree with other investors because that’s how they really make money.
GQG Partners is an American investment firm known to make contrarian investments in companies. Earlier this month, it invested ₹15,446 crore ($1.9 billion) in Adani Group companies. Definitely a contrarian bet after the Group was accused of fraud and their stocks fell by more than 50%. (In case you somehow missed the whole saga, I wrote about it here.)
One reaction to this is of skepticism. Adani Group has anyway used Mauritius-based funds to inflate its own stock prices (so the accusation goes), maybe it’s now using GQG? Well… GQG isn’t a strange Mauritius fund. It’s a company that manages $90 billion that everyone knows about and generally has a good reputation.
Okay, let’s chuck their reputation. Large banks have great reputations yet do shady deals all the time. If you’re an investment firm that manages funds with your clients’ money, and you’re in the mood to “help” a company that’s just been accused of fraud, you might do it with maybe one or two of the many funds that you manage. Why risk more?
GQG bought shares of 4 Adani companies, and it did so across more than 20 distinct funds. Some of those 20 funds include retirement funds for
- Government employees of two US states, New York and Texas
- Australian workers
- Saudi Arabian citizens
I mean… GQG isn’t going to be intentionally messing around with retirement funds across three continents, less so government ones. Adani is really just a contrarian investment.
Adani (finally) sells some stock
Back in late January, Hindenburg Research accused the Adani Group of fraud. At the time, the conglomerate was in the process of selling some stock to investors. There were broadly three reasons for this stock sale:
- Fund new projects
- Repay some company loans
- Reduce Adani’s (the individual’s) stake in Adani Enterprises, which is super high and close to the upper limit of 75%. This would also help in shutting up people (like me) who claimed Adani share prices were high only because he owned all the shares
Eventually, though, Adani Group cancelled the stock offering and returned whatever money it did raise. In a way, Adani finally did this month what he couldn’t in January. He sold some stock to investors!
There’s a difference. In January, it was Adani Enterprises selling stock. This time around, it was Adani the person that sold the stock. [1] The difference between Adani and his companies is often blurry, because he owns more than 60-70% of all his companies, but there is still a difference.
Because it was Adani the person that sold the stock and not Adani the company, the money fulfils different goals. He can’t really fund new projects [2] and he can’t repay company loans. In fact, Adani’s already putting some projects on hold.
What Adani can do with this money is repay his own loans! When Adani stock prices fell, banks that had lent money to Adani against his companies’ stock asked for some of the money back. So Adani decided to repay his loans in full. Here’s him two weeks ago repaying $2.65 billion that he borrowed to buy Ambuja Cements. I had earlier written about him repaying a similar loan of $1.1 billion.
Adani didn’t want to fund new projects, or repay the high debt that his companies have frequently been criticised for. But he clearly really needed money to repay his own loans. It was a happy coincidence that he succeeded in fulfilling goal (3) that I mentioned above—he reduced his own stake in his companies, a bit at least.
GQG likes the leniency
I wrote earlier that a company being accused of fraud, by itself, wasn’t reason enough for investors to think less of it. If you’re a company that’s accused of a number of frauds, and one of those frauds is being on the receiving end of government “leniency”, it could actually be good for your investors.
When Adani stocks started to fall, the problem wasn’t that Adani Group was accused of defrauding the government or people at large. The problem was that the Group was accused of fraud against its own investors by inflating its companies’ share prices.
For an investor whose job it is to be contrarian, the question then becomes—do the benefits of the first kind of fraud outweigh the pitfalls of the second kind of fraud? Rajiv Jain, the chairman of GQG Partners, spoke to ET Now on a Sunday morning after the $1.9 billion investment in Adani companies. Here’s what he said: [3]
Something not well appreciated is that the barriers to entry in infrastructure anywhere in the world are very high, particularly in India, execution extremely difficult.
You might remember that POSCO Iron and Steel tried to acquire land for seven, eight years, couldn’t even acquire land, and then they left. So greenfield projects are very, very difficult. And that’s what actually we quite like about this group is they have shown remarkable ability to execute on greenfield projects. And I feel that they don’t get full credit for that in terms of ability to pull that off.
Rajiv Jain likes that Adani could build infrastructure projects in a country where other multinationals couldn’t even acquire land in eight years. Yeah, I think what he’s saying is that he likes the “leniency” that Adani’s been getting from the government. And he’s willing to pay a higher price for the company because the benefits outweigh the costs. [4]
Footnotes
[1] “Adani the person” could be Adani’s family members, the trusts that hold his stock, etc., not necessarily the man himself.
[2] Technically he can, it’s still his money. But he’d have to lend to his companies, in which case he would rather just have raised money via a stock offering directly.
[3] If you watch the interview you’ll see that the swooning journalist doesn’t ask Rajiv Jain the tough questions. The journalist asks him about what he thought of Hindenburg’s accusations, and Jain waives them off saying it’s stuff everyone has already known for a while. But what does he think about the specific accusation of Adani owning Mauritius-based funds to inflate his stock prices and defraud his investors? No idea, the question wasn’t asked.
[4] Another way to look at this is that the accusations against Adani are of defrauding on price, not on assets. The assets that Adani companies own are real and tangible, there is no argument about it. The accusation of defrauding investors is about overpricing the assets, something that GQG seems to think is fine after the massive fall in share prices.
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