Adani repays some loans
Or how Credit Suisse opted out of passing the parcel, while SBI is still in the game
I’m experimenting with a voiceover for this post. You can listen to it either on Substack by clicking the button above, or on Spotify or Apple Podcasts.
Borrowing and lending are at the heart of investing. An investor might buy a company bond (that is, lend the company money) and then take that bond and use it as collateral to borrow from a bank. Maybe the company’s paying you 7% interest and the bank’s charging you 6%, so you make a neat 1% profit without technically spending your own cash.1
Also at the heart of investing is risk. If a company’s paying you a higher-than-usual interest, there’s likely to be a higher-than-usual risk. You might be OK with this risk, but sometimes the bank that’s lending money to you might not be.
That’s exactly what happened when Credit Suisse stopped accepting Adani bonds as collateral about 10 days ago. Since then, so have two others, Citibank and Standard Chartered.
Last October in Adani really likes loans, I wrote:
If you’re a lender to a company, you don’t really care where the money that’s repaid to you comes from as long as you’re paid back. If you buy a company bond, you don’t have to bet that the company will succeed; only that the company survives long enough to pay you back. The money might come from the company’s business (it isn’t), from the owner’s personal fortune, or hell, even from the most recent lender.
Lending to a company that doesn’t generate enough cash by itself is just the finance version of ‘pass the parcel’. Till someone continues to lend, it’s fine. But when the music stops, you don’t want to be the one left holding the parcel.
Credit Suisse is extremely aware of this game of pass the parcel. It’s a veteran. A year-and-half back, the bank lost $5.5 billion at exactly this game!
Very briefly, this is what happened2 : Credit Suisse and other banks like Goldman Sachs lent money to a hedge fund to buy some stocks. The hedge fund bought a ton of stock, and the price of the stock went up. So Credit Suisse and the other banks lent the hedge fund even more money to buy more stock, and kept some of the stock as collateral. This was fine for as long as the price of the stock kept going up. But then the price of the stock started going down. Some smart banks—including Goldman—were quick and sold the stock they held as collateral. Credit Suisse was slow and was left holding the parcel and got caught with a $5.5 billion loss.
Well, this time around Credit Suisse was quick! This really says more about Credit Suisse than it does about Adani. After all, banks like Goldman Sachs and JP Morgan are happy to sell Adani bonds to their clients, presumably they’re still lending against them. Credit Suisse would rather sit this one out.
Adani needs to repay Barclays
Banks had lent money to Adani against his companies’ stock. The stock prices fell. So the banks asked Adani to post more collateral. Here’s the Financial Times:
The lenders of the $1.1bn loan, which included Barclays, Citigroup and Deutsche Bank, requested last week that the billionaire top up the amount of stock pledged against the loan after a sharp fall in the shares of the listed Adani companies, according to the people with knowledge of the matter.
Since the allegations were published on January 24, the sell-off in the listed businesses had at one point knocked Rs9.4tn ($114bn), or about 50 per cent, off their value.
As the shares continued to slide, Barclays informed Adani of a margin call equivalent to 50 per cent of the loan in cash, said the people, who spoke on condition of anonymity.
Rather than post cash against the loan, which did not mature until September 2024, the Adani Group’s founder and his family opted to repay it completely. Adani has not disclosed the source of the funds used to repay the loan.
Barclays asked not just for more stock but for half the cash they lent out! So.. Adani decided to just prepay the whole $1.1 billion?!
When a bank lends you money but then asks for some of it back, it wouldn’t usually expect you to just waltz in and pay it all back at once. This is an unexpected financial cost for you, after all. You might have to sell some of your assets, maybe renegotiate the terms a bit so that you don’t have to do a fire sale. Sometimes companies aren’t able to pay at all and they go bankrupt. It’s tough!
Two weeks ago, Adani was out in the market trying to raise ₹20,000 crore ($2.5 billion) from investors. Some of it was to pay back his companies’ loans. Today, he paid back $1.1 billion when he didn’t even need to. I’d love to know where this money came from.
Adani doesn’t need to repay SBI
When Adani stocks first started falling, right after Hindenburg published its report, people were worried about banks that had given loans to Adani against his company stock. Here's State Bank of India (SBI) chairman Dinesh Khara from less than two weeks ago:
SBI chairman Dinesh Khara said the bank does not envisage the embattled ports-to-mining group facing any challenge to service its debt obligations and stressed that SBI has not given any loans against shares to the group.
Khara said that SBI didn’t lend to Adani Group with Adani company shares as collateral. So it didn’t matter to the bank if the stock prices went down.
Here’s a disclosure, and another disclosure, and yet another disclosure from earlier this week filed by SBICAP Trustee (a subsidiary of SBI), saying that they’re holding shares of three different Adani companies as collateral on behalf of SBI. It did, after all, matter to SBI if Adani shares went down.
But really, the SBI chairman misrepresenting the situation isn't the biggest concern here. In Adani really likes loans, I wrote about why banks like lending against shares:
The good thing about keeping your shares as collateral instead of, say, your house is that if your stock price goes up, you can then then ask the bank to keep fewer shares as collateral. Unlike a house, where if its market value went up, the bank wouldn’t be OK with just your bedroom. (It would make perfect financial sense to do that, mind you, just not practical sense. Try selling a bedroom without the rest of the house.)
If you’re a bank, the whole purpose of holding shares as collateral for a loan is that you can sell those shares easily, if you really had to. Two of the companies that SBI just took on more shares of, Adani Transmission and Adani Green, are hitting lower circuits nearly everyday3, which means that there are too many people trying to sell the shares with no one willing to buy.
When Barclays was worried about its loans to Adani, what it did was ask for cash. What it didn’t do was ask for more stock. Because what would it do with the shares of a company that it couldn’t sell? SBI, though, seems happy to have stock it can’t sell.
Voiceover by Junaid Khan.
Apart from this simple view of collecting the “spread” between your bond coupon and your loan interest, you might also buy a long-term bond and then need some cash along the way. Instead of selling your bond at a discount, you can just use it as collateral and borrow some short-term cash from a bank.
If you’d like to go deeper into this, Matt Levine, of course, has the best account of the episode. Here.
“Lower circuits” and “upper circuits” are stock market protection mechanisms where the exchange temporarily halts trading if the price of a certain share either goes above or below a certain pre-decided threshold. If a stock hits “lower circuit” (generally around 5 to 10% below the opening price), it means that the share price of that stock has fallen as far as it could, and the exchange can’t allow it to fall any further for that day. So, as a seller, you can’t sell any more stock.
funny and interesting shreedhar. Take a bow!