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07-03-2023, 10:03 AM
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 seems designed to shield Adani Power from extraordinary write-offs, regardless of the unit’s losses – exemplifies this balancing act, where a single asset write-down could have cascading ramifications.
“In the light of the circumstances, impairment probably would have been prudent,” said Dr Alastair Lawrence, an associate professor of accounting at the London Business School.
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Mundra was running – but haemorrhaging money.
After lifetime losses reached US$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 write-down.
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 showed. The Adani family had also committed a quarter of its equity in the company, worth almost US$300 million, as additional collateral.
Even a partial write-down, with its likely impact on Adani Power’s bottom line and share price, could have threatened the whole arrangement.
A curious financial manoeuvre followed.
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 US$600 million to Mundra, delivered through a special kind of unsecured debentures.
Filings showed the securities came with 10 per cent annual interest – but it had to be paid only if Adani Power asked. In addition, they were perpetual, meaning there was no set date when Mundra would have to repay the principal.
The move offered Adani Power a crucial advantage, said Associate Professor Miguel Angel Minutti-Meza, 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 write-down. 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, Prof Minutti-Meza said, no matter if Mundra’s losses kept piling up – which is key for Adani Power 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.
“In the light of the circumstances, impairment probably would have been prudent,” said Dr Alastair Lawrence, an associate professor of accounting at the London Business School.
......
Mundra was running – but haemorrhaging money.
After lifetime losses reached US$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 write-down.
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 showed. The Adani family had also committed a quarter of its equity in the company, worth almost US$300 million, as additional collateral.
Even a partial write-down, with its likely impact on Adani Power’s bottom line and share price, could have threatened the whole arrangement.
A curious financial manoeuvre followed.
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 US$600 million to Mundra, delivered through a special kind of unsecured debentures.
Filings showed the securities came with 10 per cent annual interest – but it had to be paid only if Adani Power asked. In addition, they were perpetual, meaning there was no set date when Mundra would have to repay the principal.
The move offered Adani Power a crucial advantage, said Associate Professor Miguel Angel Minutti-Meza, 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 write-down. 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, Prof Minutti-Meza said, no matter if Mundra’s losses kept piling up – which is key for Adani Power 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.
