Adani feels the heat from coal

IFR Asia 1198 - 31 Jul 2021 - 06 Aug 2021
6 min read
Emerging Markets, Asia
Krishna Merchant, Mirzaan Jamwal, Daniel Stanton

India's Adani Group completed another successful offshore fundraising last week, but an upcoming refinancing for its controversial Australian coal project is adding to the pressure it faces on its environmental record.

Though Adani has a large renewable energy business and uses the motto "growth with goodness", it is continuing to invest in coal projects, and its Carmichael coalmine in Queensland is due to begin production in the fourth quarter.

While other parts of the group have managed to raise funds, with Adani Ports & Special Economic Zone completing a twice-subscribed US$750m dual-tranche bond offering on Monday (See News), the Queensland terminal built to export the coal from Carmichael could struggle to refinance a US$500m bond maturing on December 15 2022.

On Thursday, Moody's lowered the outlook on its Ba2 rating for the bond from North Queensland Export Terminal, formerly known as Adani Abbot Point Terminal, to negative from stable, citing rising refinancing risk due to investors' lack of appetite for coal investments. Adani Abbot held calls for a proposed Yankee offering in March 2020, but the deal never happened, with many banks ruling themselves out due to concerns that the port will damage the Great Barrier Reef.

The existing bond is now bid at a yield of around 8.6%, according to Tradeweb, suggesting that it will be expensive to refinance. Adani Enterprises, the ultimate owner and operator of the Carmichael project, was in talks with State Bank of India for a US dollar financing for the project last year but there has been no progress on the loan approval so far.

In 2015, Adani reorganised itself from a holding company structure to four independently listed entities for its ports, power, mining and transmission businesses, but the group's coal activities are starting to affect the way investors look at the group as a whole and the separate units.

"Adani group firms cannot be labelled green if at the group level they are doubling their coal-fired power capacity to 24 GW and planning to develop or operate new thermal coal mining capacity of 132 million tonnes per annum, almost half from Australia’s Carmichael project," said Pablo Brait, a campaigner at Market Forces, an Australian group which puts pressure on institutions that fund environmentally damaging projects.

A Singapore-based fund manager said he stayed away from the Adani Ports bond offering due to ESG concerns, while Market Forces says that in March Pimco banned Adani Ports as an investment after the pressure group engaged with the US fund giant on the issue. Pimco declined to comment on that claim.

Inextricably linked

Bowen Rail, which will run the haulage operation for the Carmichael mine, was originally a subsidiary of Adani Ports, but the port operator transferred it to Adani Enterprises as part of an ESG performance review, according to its 2020/21 annual report. All the same, some analysts and investors claim it is inextricably linked to the mining project.

“If you’re buying Adani Ports bonds, you should be aware that it’s part of the logistics chain getting the coal from the Carmichael mine to India,” said Ulf Erlandsson, executive chair of Anthropocene Fixed Income Institute, a Sweden-based think tank focused on climate impact in fixed income capital markets. “Adani Power will be the company burning the coal in India. If you buy the Adani Ports or Adani Power bonds, we would argue that you have exposure to Carmichael.”

Adani Power is the thermal power unit of Adani Group, operating from the western state of Gujarat.

The Adani Group has been among the few non-government offshore loan borrowers from India this year with a Rs75bn (US$1bn) deal to refinance Mumbai International Airport's debt and a US$1.35bn loan to fund solar and wind projects in India. There is also another offshore financing for new power transmission projects in the works. Bonds are planned to take out the loans.

“If we look at the Adani Group as a whole there are ESG concerns, especially over their project in Australia, so banks are selective about which entity in the group they want to finance,” said a loan banker at a foreign bank in India.

“The usage of funds is very specific so that, in a way, gets us around the ESG issues,” he added.

But some investors and activists feel that the Adani Group's corporate structure simply allows it to shift resources between group companies in order to ensure certain units comply with the ESG label.

On second thoughts...

On July 15, Adani Electricity Mumbai was able to sell a US$300m 10-year sustainability-linked bond, which saw books covered nine times. However, VE, the second-party opinion provider for the deal, had to republish its SPO on July 21 because the original neglected to mention that part of the company's electricity came from coal-fired power plants.

Adani Group's chairman, Gautam Adani, has been vocal about plans to play a pivotal role in achieving India’s target of 450GW of renewable energy by 2030, and wants Adani Green Energy to be the world's biggest renewable energy company by that date. The acquisition this year of a portfolio of renewable assets from SB Energy raised its total capacity to 24GW, including projects under construction.

“It’s slightly surprising that Adani keeps wanting to build this coalmine because it taints everything else that they’re doing,” said Erlandsson.

Adani Group did not respond to questions from IFR.