Gautam Adani, the billionaire founder of India’s Adani Group, faces a US indictment on fraud charges, sending ripples through the global financial community.
While some global banks are reportedly holding steady on existing loans, several are considering a temporary pause on extending new credit to the conglomerate, according to sources who spoke to Reuters.
Banks assess Adani exposure after indictment
The indictment alleges that Adani and other executives authorized approximately $265 million in bribes to Indian officials to secure contracts and advance the development of India’s largest solar power plant.
This marks the second major crisis for the Adani Group in two years.
The conglomerate has vehemently denied the allegations, labeling them “baseless.”
Nevertheless, the indictment has prompted a wave of internal discussions within Adani’s lending banks.
Senior executives at two major Western banks confirmed to Reuters they are evaluating the potential impact of the indictment on the group’s financial standing and future access to credit.
A pause on fresh lending, but existing loans remain
One banker, speaking anonymously due to the sensitive nature of the discussions, indicated that new lending would likely be paused until the situation becomes clearer.
“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,” the banker stated.
While acknowledging the need for caution, the banker also noted that most Adani Group companies have stable cash flows and are not in immediate need of additional capital.
Scrutiny intensifies on “key man risk”
While short-term funding may not be a critical concern, the indictment raises concerns about the Adani Group’s long-term fundraising plans for expansion, both within India and internationally.
The increased scrutiny from creditors will likely focus not only on the outcome of the indictment but also on the “key man risk” associated with Gautam Adani’s leadership.
Government reaction a key factor
Another senior banker at a separate Western lending institution confirmed to Reuters a similar approach, stating that their bank would also temporarily freeze new lending while closely monitoring the Indian government’s response to the indictment.
“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,” the banker explained, adding that the Adani Group’s substantial presence in India’s infrastructure sector makes it “too-big-to-fail” from the government’s perspective.
All bankers interviewed for the Reuters article requested anonymity due to the confidential nature of the discussions.
Reputational risks and loan covenants
A Japanese bank with exposure to Adani, also speaking anonymously, explained that lenders typically pause new credit in such situations due to reputational risks.
However, the indictment itself would not necessarily violate existing loan covenants.
Parsing the fine print: legal implications for lenders
While the Adani Group has previously received affirmations of confidence from major global banks, including Barclays, Deutsche Bank, Mizuho, Mitsubishi UFJ Financial Group, SMBC Group, and Standard Chartered, the current situation has prompted renewed scrutiny.
S&P Global Ratings issued a note on Friday acknowledging the potential impact on investor confidence and funding access for Adani Group entities.
“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,” the note stated.
However, S&P also noted that the rated entities currently face no immediate major debt maturities.
Some global banks are reviewing bond and loan agreements to assess their potential exposure to default risk or investor demands for repayment.
Legal experts, however, suggest that the lack of a conviction limits the options for investors and banks to compel repayment.
Om Pandya, a capital markets partner at Clifford Chance, emphasized that continued interest payments by the borrower would weaken any creditor arguments for triggering a default based on existing contract clauses.
Potential civil liabilities for banks
John Joy, managing attorney at FTI Law, specializing in FCPA violations, points out that the most likely liability for banks stems from potential civil lawsuits by investors who were introduced to Adani through those banks.
“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),” Joy explained.
While Adani has not been arrested, and the extradition process from India could be complex and protracted, the situation remains uncertain.
Ed Al-Hussainy, head of emerging market fixed income research at Columbia Threadneedle, summed up the sentiment: “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.”
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