Adani-Hindenburg row: S&P says future ratings action on Adani Group will depend on THESE parameters

S&P Global Ratings on Wednesday said that it is closely monitoring additional information on the Adani Group’s governance and funding to decide on its ratings action.

In the last week of February, S&P Global revised its ratings to negative on Adani Electricity Mumbai Ltd and Adani Ports and Special Economic Zone Ltd., to highlight the governance risks and funding challenges of the wider group. The credit rating agency affirmed the 'BBB-' ratings on these entities.

S&P Global published an FAQ-style commentary titled, "Adani Group: The Known Unknowns", wherein the rating agency said the investors are keen to know and have been seeking clarity on the credit impact of a string of allegations against the Adani Group, which were published by US short seller Hindenburg Research on January 24 this year.

"Like much of the market, we are waiting for more information about the Adani Group before deciding the direction of our ratings. We believe further details on governance and funding risks over the next 12-24 months would drive the ratings," said S&P Global Ratings credit analyst Abhishek Dangra.

Hindenburg Research in its report accused the Gautam Adani-led conglomerate of engaging in brazen stock manipulation and accounting fraud scheme, and improper use of offshore tax havens.

In its report, the short-seller said key listed Adani companies have taken on substantial debt, including pledging shares of their "inflated stock" for loans, putting the entire group "on precarious financial footing".

The conglomerate in a detailed note denied all the charges. Following which, Gautam Adani's wealth nosedived by more than 60 per cent.

S&P Global in its note said that the Adani Group may face downside risks due to restricted access to funding and also due to a broader view of the quality of the group's governance.

“For example, we are likely to take a negative rating action should any investigation uncover serious wrongdoing. This may include previously undisclosed material related-party loans, cash leakage, or misreporting," S&P Global said.

It added: "Conversely, to revise the outlook to stable, we will need to be convinced that governance practices in the group and funding access will improve in line with an investment-grade credit profile."

The agency further added that it is closely watching for key points, which include the report of the Supreme Court-appointed independent panel of experts, which is individually probing the potential regulatory shortcomings in the oversight and disclosures of Adani Group.

The apex court on March 2 also directed capital markets regulator Securities and Exchange Board of India (Sebi) to submit its findings to the panel in two months.

S&P said that if the high-level probe shows illegal activities by the group, the agency would revise its ratings from fair to weak.

“If the investigation proves illegal activities by the group or points to serious wrongdoing, we could revise our assessment of management and governance down to weak from fair. This could result in a downgrade, potentially of more than one notch, depending on the effect of such activities on the credit profile,” S&P said.

It added that any significant adverse audit observations, qualified audit opinions for the year ending March 31, 2023, or significant reporting and disclosure weakness identified by any company-appointed independent external reviewers may also trigger a revision. "We will also review the group's ability to raise equity and debt, both via private placement or through public debt markets," it said.

Earlier this month, US-based and Australia-listed boutique investment firm GQG Partners Inc bought shares worth $1.87 billion in four Adani group companies. GQG Partners, through block deals, bought shares worth Rs 154.46 billion in four Adani group companies, including the conglomerate's flagship firm Adani Enterprises, a regulatory filing showed. The shares were sold by an Adani family trust, using Jefferies as a broker.

S&P in its Wednesday note said: “Any fresh share-backed loans raised by promoters could pose funding risks for the larger Adani Group and rated entities," S&P said.

Management, it said, may review growth plans, capital expenditure (capex), leverage tolerance, and financial policies for group entities.

The report highlighted that Adani Group’s relationship with domestic and international banks will be critical to meeting the group's funding needs. “Security and repayments terms will affect the group's financial flexibility,” S&P said in its report.

“Assessing the group's creditworthiness, leverage and liquidity position is difficult given our reliance on public information for unrated listed entities. We also rely on limited public disclosures of unlisted, private entities, and of funding or liabilities at the promoter level," said S&P Global Ratings credit analyst Richard Langberg.

He added: “We already assess governance as a relative weakness in our rating analysis of Adani Group entities due to significant promoter control, frequent related-party transactions, lack of transparency of the credit position of the promoter-held entities, and aggressive growth appetite.”

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