12 March 2020
Adani is asking investors to back the Abbot Point coal export terminal for the next seven years through a new bond. With take-or-pay contract protection now largely expired, whoever invests is placing a massive bet about the Carmichael coal project going ahead, but some key aspects of the bond suggests Abbot Point is the rust in the company’s crown.
Last week, Reuters reported that Adani had appointed Stifel, Emirates NBD Capital, Haitong International and CLSA to arrange a new, $100 million, seven-year bond for the Abbot Point coal export terminal, with investor meetings already taking place.
Don’t feel out of touch if you’re not familiar with these financial institutions. They are not in the same league as most global investment banks that would do the arranging for bonds like this. This fact, along with the BBB- rating (the lowest investment-grade rating you can get) from Fitch and S&P suggests this is at the risky end of the scale for any investor.
And that’s unsurprising given that the seven-year time-frame of the bond being issued is when Adani is hoping to bring the Carmichael coal mine online. All of the coal would be shipped through Abbot Point meaning the security of this bond and any other long-term investment in Abbot Point depends heavily on whether the Carmichael coal mine goes ahead.
In other words, investors buying into this bond are betting that Adani’s Carmichael project proceeds.
Is Adani really self-funding Carmichael?
It’s been over a year since Adani claimed it had reached financial close on its Carmichael coal mine and rail project, only for it to emerge that Adani’s mystery financial backer was itself.
This was impressive spin, even from Adani. Its announcement reflected the fact that after years of trying and failing to secure a private backer for its environmentally, socially and financially risk-laden mega coal mine and rail project, it had turned up nothing. It had even tried to tap into the public purse, seeking a loan of almost $1 billion from the Northern Australia Infrastructure Facility, to no avail.
But using the company’s own money to pursue its growth plans just isn’t Adani’ style. Its growth, like that of many seeking to expand quickly, is built on debt. It has, and continues to, aggressively expand its operations in India in sea and air ports, power, transmission and other forms of infrastructure, seeking out billions of dollars in capital injections to fund its growth plans.
Even in Australia, when Adani says it has invested over $3 billion it’s important to remember this is other people’s money. Nearly $2 billion came from a loan so Adani could acquire the Abbot Point coal export terminal in 2011. If you ever have any doubt about just how much Adani’s own money is an act of last resort, remember: it has had the capacity to self-finance the Carmichael project for years and still asked Australian taxpayers to chip in $1 billion of public money for a project most of us don’t want to see happen. And Adani has high hopes of securing another capital subsidy in the form of a royalty deferral for seven years (worth a cumulative A$700m), but reports suggest Adani has been unable or unwilling to front up the financial assurance Queensland Treasury has requested.
Adani going big into bonds
Over the past year, the Adani Group has repeatedly used the international bond market to raise capital and refinance debt in a way that creates massive new opportunities for the conglomerate. A bond is a form of debt, different to a typical loan largely because of the spread of investors that buy in, and the terms on which the debt is to be repaid.
Bonds are appealing because of the lower rates the borrower has to pay and also offer a lot more flexibility to the borrower about how the funds are used. And that’s where things get worrying for the #stopadani campaign.
Since mid-2019 Adani companies have been very active in raising money on the bond market, with the following being some of Adani’s most recent moves:
- Adani Green raised US$500 million in May 2019 and a further $362.5 million again in October.
- Adani Ports raised US$750 million in June 2019 and was reported to be seeking another US$650 million.
- Adani Transmission was, as of September 2019, looking to raise US$750 million to $1 billion. In November it was reported that Adani Transmission had finalised a $500 million, 16.5 year bond. Then in February 2020, Adani Transmission reached out to investment banks to launch a US$1bn bond which it hoped to secure in April 2020.
- In February 2020, Adani Electricity Mumbai issued a US$1 billion 10-year bond.
Why bonds can help Adani fund Carmichael
These bonds make a huge difference to Adani’s overall financial strength. In the first instance, they help to pay down Adani’s significant indebtedness to Indian banks, benefitting Adani in two ways:
- Improving the terms (duration and cost of borrowings) of debt that it needs to service, and
- Reducing its exposure to Indian banks, which can then be tapped at a later date as and when additional financing is required.
Adani may have just freed up in the order of US$4 billion in capital that was in the form of debt to Indian banks by reissuing the debt as international bonds to a completely different group of financiers.
But the opacity of how capital raised through bonds is used is also a major concern. A report from May 2019 examined Adani’s growth through borrowing money and found a “high-density of ‘related party transactions’ or transactions between companies that are connected”. In other words, Adani routinely moves money around between the group of companies it controls, lending from one part of the conglomerate to another.
According to Indian guidelines companies are not supposed to use the proceeds of bonds for anything other than their intended purpose, but nothing seems to be in place to prevent the proceeds from a bond issued to Adani Ports to end up in Adani Australia. All that matters for the transaction is that the bond holders get their payments on time.
In other words, one Adani borrowing from another in the group. This is a major concern if Adani companies are out raising money through bonds.
Who is providing the bonds?
The arrangers of these bonds often include names familiar to the #stopadani campaign. Standard Chartered is a frequent arranger of bonds to Adani companies, sharing the duties on the recent Adani Green issue with Barclays, Citigroup, Credit Suisse, Deutsche Bank, JP Morgan, and MUFG Bank. Of these, only MUFG has not taken a position that it would not finance the Galilee Basin coal export projects.
Arrangers of Adani Transmission bonds include Barclays, BNP Paribas, Bank of America, Credit Suisse, DBS, Deutsche Bank, Emirates NBD, Mizuho, Standard Chartered and UBS.
Adani Electricity’s bonds were arranged by Barclays, Citigroup, DBS Bank, Deutsche Bank, Emirates NBD Capital, JP Morgan, MUFG and Standard Chartered Bank, Bank of America, Credit Suisse and Mizuho Securities.
The arrangers of the bonds then sell them to a global marketplace that contains insurance companies, institutional investors and other private banks.
Ultimately, if Adani is drip-feeding capital through to the Carmichael coal mine and rail project through the wider group, the arrangers and investors of any of these bonds could be helping to finance the opening up of the Galilee Basin, a carbon bomb of global proportions.