$1 billion loan no cakewalk for Adani group; SBI says company will have to repay Rs 5000 crore for fresh credit

Friday, 21 November 2014 - 7:30am IST | Place: Mumbai | Agency: DNA

Bulging credit

Rs 72,632.37 crore --Total debt as of September 30, 2014

Rs 8,999.92 crore total operating profit over last four quarter

Rs 5,733.77 crore interest on the debt

Amid uproar over State Bank of India (SBI) extending $1 billion loan to Adani group's ambitious Australian mining project, the lender on Thursday clarified that the group will have to first repay and prepay loans of about Rs 5,000 crore to get the fresh credit.

The net fresh lending to the group after due diligence to develop the $7.5 billion Carmichael coal mine project in Queensland, Australia, will be only $200-400 million depending on the repayments, according to SBI.
Arundhati Bhattacharya, chairman of SBI, said as of now this is only a memorandum of understanding (MoU).

"The company has to undertake repayments and prepayments. The loan itself is subject to techno-economic study, compliance with our credit policies and approval by the bank's board. The final decision will be based purely on commercial considerations. The project is good and will help in energy security as the quality of coal is very good. But Adanis have to repay a portion of the existing loan that we have extended to them. The net fresh lending will only be about $200 to $400 million," she told dna.

The coal mining project has a debt-equity ratio of 70:30.

"Unless the company brings in the equity, the bank will not give any funding. The Queensland government is also putting in some equity. Only after the equity part is ready, will the bank step in," said Bhattacharya.
The loan is being extended to Adani Mining, the Australian subsidiary of Adani Enterprises, for the mine, which has massive blocks of untapped coal reserves.

Adani Enterprises has won support from the Australian state and an MoU from SBI for the coal mine project, despite a slump in coal prices to five-year lows.

Promoter Gautam Adani is also banking on Australia's big four banks along with export credit agencies of Korea and the US for a financial closure of his most ambitious project. Up to $1.5 billion is expected to be raised from South Korea's export credit agency as theAdani Group has awarded a $2-billion contract to Korean company Posco to construct the 388-km railway line to connect the Carmichael mine to Abbot Point.

Prime minister Narendra Modi met Queensland premier Campbell Newman in Brisbaneculminating in a commitment from the government there to take short-term, minority stakes in Adani Group's rail and port infrastructure projects.

Despite such assurances from SBI, the potentially huge lending has created an uproar in India and critics have accused the lender of favouritism. Experts are also worried at the huge debt that the Adani group has piled up.

According to analyst Vivek Kaul, as on September 30, 2014, the total debt of the group stood at Rs 72,632.37 crore. Total operating profit of the group over the last four quarters was at Rs 8,999.92 crore. The interest on its debt was Rs 5,733.77 crore.

"This means an interest coverage ratio of around 1.57. Interest coverage ratio is essentially the earnings before interest, taxes and exceptional items (or operating profit) of a company divided by its interest expense. It tells us whether the company is making enough money to pay the interest on its outstanding debt. The lower the interest coverage ratio the better the situation of the company. Also, the moment the interest coverage ratio starts hovering around 1.5, the ability of the company to keep paying interest on its debt becomes questionable," Kaul said in his blog.

Also, a matter of concern is the growing NPA of public sector banks. Deepak Shenoy who runs www.capitalmind.in said the net non-performing assets of the 12 banks that are a part of the 50-share Nifty Index rose by 13.31%, for three months ended September 30, 2014, in comparison to the same period last year.

The Carmichael project has been facing the ire of environmentalists in Australia too because of potential danger that the mine will cause to the Great Barrier Reef.

Meanwhile Congress party on Thursday questioned the decision of SBI to give $1 billion loan to Adani during PM's visit to Australia, according to PTI.

"What was the propriety of the SBI giving the loan to Adani, who was sitting next to the prime minister during the visit, at a time when some five foreign banks have denied credit to the group for the project?" party general secretary Ajay Maken said. He alleged that the PM appeared taking keen interest in "promoting" Adani in getting the loan worth Rs 6,200 crore during the visit in which the SBI chairman was also present.

"When five top foreign banks have already declined to fund Adani's project, what was the need and the sense in giving such a huge loan to him from the hard-earned money deposited by the common people? Did the SBI do the due diligence? If it did so why it is not declaring the MoU? On what conditions it was done? And what was the liability?" Maken said.

He also saw contradictions in the PM's thrust on coal mining in Australia and the coal minister Piyush Goyal's statement that India will be able to stop import of coal in the next two years.

SBI’s $1 bn promise to Adani group: The public bank has a lot of explaining to do

Dinesh Unnikrishnan. F BIZ 22 NOV 2014

The Rs 6,200 crore loan agreement the State Bank of India (SBI) signed during Prime Minister Narendra Modi's Australian visit to fund Gautam Adani’s Carmichael coal project in Queensland has been questioned on the basis of its merits, with the proposal evoking sharp criticism from Congress party as it alleged that Modi is promoting Adani and is using the government lender to come to the aid the industrialist.

The critics have primarily the following questions: Why did SBI decide to give a $ 1 billion loan to a project, whose previous attempts at fund raising were was turned down by several international banks who cited non-viability of the project? Also, Adani's bigger coal rivals in Australia, such as BHP Billiton and Glencore, have shelved coal developments in the backdrop of Australia's coal industry making losses. What is the guarantee that SBI won’t burn its hands by lending to Adani for such a project?

SBI has defended its position saying it has only signed a memorandum of understanding with Adani to extend credit facilities. The actual disbursement will happen only after assessing the details of the project and being convinced about the merits, the lender said.

According to SBI chairman Arundhati Bhattacharya, after repaying an existing loan to the bank, the net fresh funding to Adanis will be $200 to $400 million (about Rs 1,200 crore to Rs2,500 core).

Probably, here are the larger concerns that SBI should address:

One: Using part of the fresh loan from the same lender primarily to repay an old existing loan amounts to ever greening of the loan or clandestine restructuring, something which the Reserve Bank of India (RBI) has been cautioning banks against over the years. That is particularly important if the future cash flows from a particular project, for which the money is given, is doubtful.

Two, if the $ 1 billion loan is indeed intended for the Carmichael coal project and the partial repayment is for loans drawn earlier for other projects in the group, then that becomes a case of a diversion from the stated end-use ( assuming that the stated use in this case is the development of the Carmichael project.) Is that the case?

Or else, if it is a top up loan for the same project, it would, in fact, add to the repayment burden of the company since the total outstanding increases if the project doesn't turn out to be profitable.

Ever-greening has been a problem with the Indian banking sector and is the reason for pile up of hidden stressed assets in the form of restructured advances.

Any banker would admit that of the Rs 6 lakh crore of loans are currently being recast under various channels—bilateral restructuring and corporate debt restructuring—there is a significant chunk of hidden bad loans. The reason is that in several cases companies didn’t deserve loan recasts and got the facility through understandings achieved in state-run banks thanks to political influence.

In such cases, what really happens is a bank loan, which is practically a bad loan, is maintained as a standard account through some sort of top up loan or easing of norms. This is done in the mutual interest of the lender and borrower. Let’s admit that Indian banks are neck-deep in bad loans and the problem is huge. It's high time caution is exercised.

About Rs 2.6 lakh crore of the total loans given by banks are already bad. Besides the genuine reasons such as economic slowdown, a major part of the bad loans can be attributed to careless, imprudent lending by banks to large corporations.

As at end September, Adani enterprises have total debt of Rs 72,632 crore, which includes long-term debt of Rs 55,365 crore and short-term debt of Rs17,267 crore. As an earlier Firstbiz article pointed out, the group’s ability to repay its debt obligations is perceived to be weak as reflected in its declining interest coverage ratio.

RBI governor, Raghuram Rajan, in the past had highlighted the danger of rampant evergreening on stressed assets.

“Ever-greening is trying to ignore the problem and taper over for later period and thus create large problems in future,” he had said.

In Adani’s case, given the political and public attention on the deal, SBI will be complicating the whole affair if it is not clear on the actual use of the promised money.

There is not much strength in SBI’s argument that the transaction is not done and it is just an agreement. Such a major proposal, announced at a foreign venue presided by heads of nations, must be followed up with actions. The question here is where exactly will the money SBI plans to give Adani group be deployed?

If a good chunk of the money goes to clean up the balance sheet of Adani and evergreen its old debt, the whole exercise will set yet another bad precedent in Indian banking, which is presently struggling to tide over a bad phase.

1 Billion loan to Adani : SBI's $1 billion loan to Adani makes no sense, here's why

The State Bank of India(SBI) has decided to lend up to $1 billion to Adani Mining, the Australian subsidiary of Adani Enterprises for the Carmichael mine in Queensland, Australia. The mine has massive blocks of untapped coal reserves. The company aims to build the project by end of 2017.

"The MOU with SBI is a significant milestone in the development of our Carmichael mine," Adani said in a statement released yesterday

The loan as and when it is extended would be one of the largest given out by an Indian bank for a foreign project. The question is should SBI be giving out a loan of up to $1 billion to a company which already has a huge amount of debt.

Let's take a look at how the numbers look. As on September 30, 2014, the long term debt of the company stood at Rs 55,364.94 crore. The short term debt stood at Rs 17,267.43 crore. Hence, the total debt of the company stood at Rs 72,632.37 crore.

As on March 31, 2014, the total debt of the company stood at Rs 64,979.04 crore. Hence, the total debt of the company has shot up by Rs 7653.33 crore in a matter of six months.

The question we are trying to answer here is how good is the ability of the company to service all the debt that it has managed to accumulate. For that we use results of the last four quarters and calculate the interest coverage ratio. Interest coverage ratio is essentially the earnings before interest, taxes and exceptional items (or what is often termed as operating profit) of a company divided by its interest expense. It tells us whether the company is making enough money to pay the interest on its outstanding debt.

The total operating profit of the company over the last four quarters comes at Rs 8999.92 crore. The interest that the company has paid on its debt in the last four quarters amounts to Rs 5,733.77 crore. This means an interest coverage ratio of around 1.57.

As www.investopedia.com points out “The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.”

While Adani Enterprises' interest coverage ratio is not lower than 1.5 it is clearly getting there. In fact, things get even more interesting once we start calculating the interest coverage ratio on the basis of quarterly data. The interesting coverage ratio for the period of three months ending March 31, 2014, stood at 2.67. It stood at 1.58, for the period of three months ending June 30, 2014. And for the period of three months ending September 30, 2014, it stood at 1.12.

As we can see, the ability of the company to keep paying the interest that it needs to pay on its debt has come down dramatically during the course of this financial year. As www.investopedia.com points out “An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses.” Adani Enterprises is clearly moving towards this situation. Further, in a May 2014 report, Bank of America Merrill Lynch had estimated that the company would have an interest coverage ratio of 1.2 during the course of this financial year.

What all this clearly tells us is that Adani Enterprises is in an over-leveraged situation and is getting to a situation where it will find it difficult to keep paying the interest on its debt. The thing with debt is that it can work both ways. When a company takes on a higher amount of debt it gives itself an opportunity to generate higher earnings vis a vis a situation where it hadn't taken on that debt at all.
If this happens, then these increased earnings are spread among the same number of shareholders. But at the same time the company runs the risk of getting into a situation where the projected earnings simply don't come along and it finds it difficult to keep paying the interest on all the debt that it has taken on.

Adani Enterprises runs the risk of getting precisely into this situation. Further as a Reuters news-report points out “Much bigger coal rivals, like BHP Billiton and Glencore, have also shelved coal developments in Queensland at a time when a third of Australia's coal output is making losses.”

Also, coal prices have fallen over the last few years. As a recent report in The Hindu points out “Globally, coal prices have been on a downtrend in the last three years and are at the lowest levels since 2009. Prices of steam coal, a slightly lower grade that is used in power generation, have halved since 2011 to $62 per tonne now.”

This fall in prices has happened because of the supply not shrinking along with demand. “For instance, demand from China — the largest consumer of coal accounting for half of the total global demand — has been slow. After growing at over 10 per cent annually during 2001-2011, the country’s demand has fallen — imports were down to 150 million tonnes (mt) in 2013, from 182 mt in 2011. And given the pollution-related issues, it is expected that the country may look at cleaner sources more actively, holding down demand. Goldman Sachs estimates that imports will fall to 75 mt by 2018,” The Hindu points out.

Goldman Sachs expects the demand growth to be 15 million tonnes per year during 2013-2018, against 60 million tonnes per year it was at during 2008-2012. The supply of coal isn't likely to come down. In case of Australia the miners have entered into long term “take or pay” contracts which requires them to pay $20 per tonne of transport costs, irrespective of the fact whether or not they ship coal. Hence, Australian miners are likely to continue to ship coal.

What this tells us is that coal is not the best business to be in right now. Despite these reasons SBI has gone ahead and given a loan of up to $1 billion to Adani Enterprises. This is not a logical decision which takes into account the facts as they prevail. The only possible explanation for this decision is the “so called” closeness of Gautam Adani, chairman of Adani Enterprises to Narendra Modi, the prime minister of India.

Vivek Kaul is the author of the Easy Money trilogy. 19 Nov 2014