The State Bank of India (SBI), Bank of Baroda (BoB), Indian Bank, Punjab National Bank, and EXIM Bank -- all public sector entities -- have a committed a loan facility of Rs 6,071 crore to Adani's greenfield copper project, which is now in the spotlight.
These banks now face an additional risk concerning the project's credit rating.
The trio -- SBI (Rs 1,846 crore), BoB ( Rs 1,750 crore) and Canara Bank ( Rs 1,000 crore) -- have over 75 per cent of the loan exposure. There are no private or foreign banks involved in financing this greenfield project.
BoB's CEO and MD Sanjiv Chadha recently said the bank would continue to support the Adani Group if it met the underwriting standard. There are, however, clauses in the loan agreement that would trigger a higher interest rate. This loan facility is linked to the marginal cost of fund-based lending rate (MCLR).
"We have the right to revise the interest rates higher in the event of any rating downgrade. In fact, we have our own internal credit rating for the project. Any deviation downwards would mean a higher risk premium on the loan facility," said a lender on condition of anonymity.
The company named Kutch Copper Ltd., a wholly owned subsidiary of Adani Enterprises Ltd (AEL), is building an integrated copper smelting and refinery complex with an annual capacity of 0.5 MTPA. It has plans to produce copper and even its by-products and precious metals like gold and silver.
Although the project has only just completed its approval processes, it is still in its infancy stage.
While Kutch Copper had big plans to emerge as the largest single location copper smelting plant in the next 5-6 years, it has to now moderate its ambitions in light of the current challenges group is facing.
The bank loan facility of Rs 6,071 crore has been rated as A- with stable by India Ratings since April of this year.
This rating is considered to have an adequate degree of safety regarding timely servicing of financial obligations. Technically, the banks will only take action when this rating goes below BBB-.
India Ratings' next level below A- is BBB, which means a moderate degree of safety regarding timely servicing of financial obligations.
Following the release of the Hindenburg report, India Ratings and Research has said that there would be no immediate impact on the ratings of Adani Group entities. "Ind-Ra sees a limited impact on the cash flows of the underlying business and also takes note of the liquidity available with the respective entities in the form of cash on the balance sheet, unused working capital limits, and debt tied-up for the ongoing construction projects," it said.
The rating agency, however, said that the management has confirmed that large capex plans across entities would be moderated or deferred in line with the capital management plans of the group. There was , however, no specific mention of Kutch Copper Ltd.
When these seven PSBs committed to loan facility last year, Adani Group was riding high on the back of acquisitions, rising market cap, and entry into new areas.
The comfort for lenders was AEL, the holding company, which has incubated this new business of setting up a copper smelter.
The rating agency also considered the group's strength, including its market capitalization, which has now fallen below USD 100 billion. AEL is also the market's biggest loser in terms of market valuations.
"The ability of the group to raise equity through minimum dilution has also been dented following the damaging report by the short seller," say banking experts.
AEL has already withdrawn its follow-on offering of Rs 20,000 crore, which was for refinancing and funding new incubated businesses.
Adani Group has claimed that the copper project is on track.
Jugeshinder Singh, group CFO of Adani Group, said during a post-Hindenburg investor call that the copper plant is an existing project. "It's continuing. We are continuing with the project. Its construction is on schedule, and we will complete it on schedule."
As of March 31, 2022, the total assets of this new venture were listed at Rs 130.83 crore. At present, the debt equity ratio is at 7: 3. At the time of the loan sanction, the project cost agreed was Rs 8,673 crore. The banks agreed to provide Rs 6,071 crore, while the promoters would contribute around Rs 2,602 crore.