Global banks weigh halting fresh credit to India’s Adani after U.S. indictment, say sources

By Shankar Ramakrishnan, Sumeet Chatterjee, Davide Barbuscia and Sinead Cruise

HONG KONG/NEW YORK (Reuters) – Some global banks are considering temporarily halting fresh credit to India’s Adani Group but staying put with existing loans following U.S. prosecutors’ indictment of its billionaire founder Gautam Adani for fraud, sources said.

U.S. prosecutors have charged eight people, including Adani chair Gautam Adani, with agreeing to pay about $265 million in bribes to Indian government officials to obtain contracts and develop India’s largest solar power plant project.

The crisis is the second in two years to hit the ports-to-power conglomerate founded by Adani, 62, one of the world’s richest people. Adani Group has said the allegations made by the U.S. authorities were “baseless and denied”.

Senior executives at two of Adani’s global lenders said that they have had multiple calls within their respective banks since the indictment details were announced to discuss exposure to the group and what the impact of the latest development would be on the group’s financials.

“We will have to put a pause to fresh lending until we are able to figure how this will play out. I think it will be a while before the bank is able to tap the credit market,” said a banker at one of the leading Western banks.

The banker, who is involved in talks related to Adani credit exposure and declined to be named as he was not authorised to speak to the media, said most of the group firms have stable cash flows and are not in “desperate need” to raise capital.

The indictment would, however, cast a cloud over fundraising plans for expansion within India and abroad, as there will be greater creditor scrutiny not just on the indictment outcome but also on the “key man risk” for the group, the banker said.

A senior banker at another Western bank, which is one of the major lenders to the group, said that the bank would also put a temporary freeze on fresh lending it was keeping a close watch on the Indian government’s reaction to the indictment.

All the bankers spoke to Reuters for this story on the condition they and their institutions would not be identified due to the sensitivity of the matter and because the internal discussions are confidential.

Indian opposition parties that have long complained that Adani and his conglomerate have been treated favorably by Prime Minister Narendra Modi’s government called for an investigation into allegations of wrongdoing.

Modi and Adani, both from the western state of Gujarat, have denied impropriety.

“Our future course of action will largely depend on whether the government will now try to find a way to resolve this or launch its own probe,” said the senior banker at a Western bank, adding the infrastructure giant has now become “too-big-to-fail” for India.

A Japanese bank with credit exposure to Adani said in cases like the one involving the Indian conglomerate, lenders tend to pause fresh lending due to reputational risk. The indictment of an individual, however, would generally not break any of its loan covenants, said the bank, which declined to be named.

Adani did not immediately respond to Reuters request for comment.

DEBT MATURITIES

In a statement in April last year, Adani said global banks including Barclays (LON:), Deutsche Bank (ETR:), Mizuho (NYSE:), Mitsubishi UFJ (NYSE:) Financial Group, SMBC Group and Standard Chartered (OTC:) reaffirmed confidence in the Adani group after it was hit by a short-seller attack.

Spokespersons for the three Japanese banks declined to comment, while others did not immediately respond.

S&P Global Ratings said in a note on Friday the indictment could affect investor confidence in Adani group entities, thereby potentially impairing their funding access and increasing their funding costs.

“We believe domestic, as well as some international banks and bond market investors, look at Adani entities as a group, and could set group limits on their exposure. This may affect the funding of rated entities,” it said.

The rating agency, however, added that the rated entities have “no immediate and lumpy” debt maturities.

Some global banks with ties to Adani are parsing through bond and loan documentations to see if it exposed them to a risk of default or created a liability if investors decided to demand their money back, said another banker.

But there was not a lot of legroom in documentation for either investors or the bankers to force the company to pay them back since there was no conviction yet, said lawyers familiar with corporate bond and loan agreements.

Om Pandya, a Houston-based capital markets partner at Clifford Chance, said continued payment of interest by a borrower would also typically undermine any potential argument by creditors looking at clauses in loan or bond documentations to trigger a default.

The most likely liability facing the banks is civil liability from investors introduced to Adani through the banks, said John Joy, managing attorney at FTI Law, a law firm that specializes in Foreign Corrupt Practices Act (FCPA) violations.

“Civil litigation is a lengthy process, and it is possible that during discovery investors could uncover involvement that has not been disclosed by the SEC (Securities and Exchange Commision) or DOJ (Department of Justice),” he said.

Adani has not been arrested yet and U.S. prosecutors would need to ask the Indian government to extradite him under the terms of the countries’ extradition treaty. Adani could fight extradition, and it is unclear how long the process might take.

“There’s been no conviction … but if you’re a risk officer at a bank with exposure to Adani, maybe you’re getting a little bit nervous,” said Ed Al-Hussainy, head of emerging market fixed income research at Columbia Threadneedle.