Adani stuffs plant with $1b debt that won't go down

Few places encapsulate the questions swirling around billionaire Gautam Adani like the Mundra power plant — a coal-fired colossus that for years has burned through money.

This crown jewel of his power company, which can light up millions of homes, has more liabilities than assets and has run up $1.8 billion of losses. To paper over the deficit, Adani has deployed more than $1 billion of creative debt-financing and reassured investors and lenders that profits will come soon.

But Adani Power Ltd's auditor can't fully make sense of the math underpinning this claim — and neither can accounting experts who spoke with Bloomberg News.

The divergence is a microcosm of the battle playing out in real time and spectacular fashion between Adani's sprawling empire and investors swayed by Hindenburg Research's claim that the Indian tycoon is behind "the largest con in corporate history."

Adani has denied the short seller's accusations of stock manipulation and accounting fraud. Still, companies in his conglomerate lost as much as $153 billion in combined market value after Hindenburg's salvo, though bounced back last week. His personal wealth has tumbled by more than half to $49.8 billion, according to the Bloomberg Billionaires Index. 

At the core of investors' skittishness is the debt-fuelled and intertwined nature of how the Adani empire bankrolls its titanic expansions.

The Mundra Thermal Power Plant — and its debt, which experts say appears designed to shield Adani Power from extraordinary writeoffs, regardless of the unit's losses — exemplifies this balancing act, where a single asset writedown could have cascading ramifications.

"In light of the circumstances, impairment probably would have been prudent," said Alastair Lawrence, an associate professor of accounting at the London Business School.

Adani Power did not reply to an email with detailed questions for this story, nor to a dozen follow-up phone calls since Wednesday.

Initial issues

Adani, 60, entered power generation almost 15 years ago like he does most industries: bigger and bolder than competitors.

He quickly amassed enough plants to become one of India's largest suppliers. Mundra, the flagship, was built near the Gujarat coast in western India, its gateway for global commerce. When operating at full capacity, it can power more than 5 million rural homes.

Unlike most Indian plants at the time, Mundra was built to run largely on coal imports from Indonesia, where Adani Group owned a stake in mining operations. The plan, meant to control costs, fell apart when Indonesia's government linked fuel exports to more expensive overseas prices quoted in US dollars, and the rupee began a years-long slide.

To match the rising costs, Adani Power tried to renegotiate agreements with local electricity distributors. When that failed, the dispute moved to the courts, kicking off a drawn-out fight.

Meantime, Mundra was running — but haemorrhaging money.

After lifetime losses reached $1.5 billion five years ago, Adani Power's newly appointed auditor, SRBC & Co., flagged that there was "material uncertainty" around the subsidiary holding the plant that could cast "significant doubt" on its ability to continue as a going concern — a common precursor to an asset writedown.

That could have had far-reaching consequences. All of Mundra, including the land the plant sits on — constituting about one-third of Adani Power's assets — had been pledged as security for bank loans, filings show. The Adani family had also committed a quarter of its equity in the company, worth almost $300 million, as additional collateral.

Even a partial writedown, with its likely impact on Adani Power's bottom line and share price, could have threatened the whole arrangement.

A curious financial manoeuver followed.

Mundra manoeuver

Inside Adani Power sits a sub-entity resembling an investment company, identified in financial statements as "Standalone." Through this vehicle, Adani Power lent more than $600 million to Mundra, delivered through a special kind of unsecured debentures.

Filings show the securities came with 10% annual interest — but it only had to be paid if Adani Power asked. And they were perpetual, meaning there was no set date when Mundra would have to repay the principal.

The move offered Adani a crucial advantage, said Miguel Angel Minutti-Meza, the accounting department chair at the University of Miami's Herbert Business School.

An equity investment might have needed to be written down if the plant kept losing money, he said. A standard loan would have put Mundra on the hook for regular interest payments — or else face a possible writedown. (These are fair-value adjustments, made to give investors a reasonable picture of an asset's prospects.)

But the debentures seem custom-made to avoid such consequences, Minutti-Meza said, no matter if Mundra's losses kept piling up. Which is key for Adani Power, he added, because "a large impairment may trigger a series of defaults" depending on its loan terms.

"This corporate structure is set up almost to deny responsibility," he said.

Like many perpetual debentures, these count as equity, not debt, in financial statements, improving Mundra's closely watched debt-to-equity ratio. Since it's not on the hook for interest, "Standalone" doesn't have to set aside a cash reserve in case the plant misses a payment.

Auditor concerns

None of the experts who spoke to Bloomberg News for this story raised questions about the arrangement's legality. And SRBC, an Indian affiliate of London-based EY, gave the Mundra subsidiary a clean opinion in 2019. But it raised a red flag about the investment company.

"We have not been able to corroborate the management's contention of realising the carrying value of its investments" in Mundra, SRBC partner Navin Agrawal wrote in the 2019 audit report. "Accordingly, we are unable to comment on the appropriateness of the carrying value" and the "consequential impact" on the company's finances.

Agrawal has reiterated this stance every year since, even as Mundra in 2021 received a capital infusion of more than $400 million through a second tranche of special debentures.

These concerns haven't marred SRBC's overall opinion on Adani Power. Minutti-Meza said this shows how the debentures likely have shielded the company from the plant's troubles, and from investor and creditor questions.

Adani's mundra coal plant has been running below capacity

High fuel costs and unprofitable sales contracts curbed output

graph

The accounting experts concede that estimating a power plant's future value is complex, giving Adani some leeway. Its life can span decades. Revenue is often dependent on contracts with local governments. Coal prices and currencies rise and fall. And Mundra has been generating some cash, even though it's been losing money on paper.

Still, repeated auditor reservations (in Mundra's case, four) are very unusual, said Francine McKenna, an accounting lecturer at the University of Pennsylvania's Wharton School.

"If this company was listed on a US stock exchange, the auditor would not have been able to get away for several years with an opinion that has such a material limitation of scope," she said. Such situations typically go one of two ways: either the company provides proper answers, or the auditor resigns, she added.

Asked to comment, SRBC said in a statement: "As a firm policy, we do not comment on company-specific matters."

Alleged embellishment

Hindenburg highlighted SRBC's reservations about the Mundra plant as a sign of how Adani's companies allegedly embellish financial statements.

Others in India have taken a more cautious approach. 

Tata Power Co's Gujarat plant has endured the same bad stretch as Mundra and also used perpetual debentures to keep the operation afloat despite losses. 

But the company has recorded a partial impairment of its investments in the plant and its related assets, and hasn't pledged equity to secure bank loans. SRBC, which is also Tata Power's auditor, hasn't raised red flags about the accounting of those investments.

In 2019, it looked as if Mundra caught a break. India's central power regulator allowed Adani Power to raise electricity prices in Gujarat to offset higher coal costs. And last week, the company said another of its plants had persevered in a price dispute with an electricity distributor.

But even with the increase, the colossal Mundra plant has lost money in each of the last three fiscal years. Government data show it still operates far below capacity.