New Delhi, December 6, 2024 (PTI): In a notable development, U.S. investment banking giant JP Morgan has assigned an ‘overweight’ rating to four Adani Bonds issued by the Adani Group, citing the conglomerate’s robust ability to scale operations and generate growth through internal cash flows, which mitigates potential credit risks.
According to JP Morgan’s report, three of the bonds rated ‘overweight’ were issued by Adani Ports & Special Economic Zone (SEZ), while the fourth is associated with Adani Electricity Mumbai Ltd, a subsidiary of Adani Energy Solutions Ltd. However, the report maintained a neutral stance on five other bonds from the group and labelled one bond issued by Adani Green Energy Ltd as ‘underweight.’
Understanding JP Morgan’s Ratings in respect of Adani Bonds:
JP Morgan evaluates bonds using three key ratings:
- Overweight: Suggesting a buy recommendation.
- Neutral: Indicating a hold position.
- Underweight: Falling under a sell recommendation.
In the case of Adani Group, the ‘overweight’ ratings reflect JP Morgan’s confidence in the group’s financial fundamentals, particularly its ability to manage credit stress through steady internal cash flow generation. The report emphasized the intrinsic equity value of businesses like Adani Ports, which it considers a critical factor in mitigating credit risks.
Potential Upsides and Risks
The report highlighted several factors that could enhance the performance of Adani bonds:
- Swift resolution of the U.S. Securities and Exchange Commission (SEC) and Department of Justice (DoJ) investigations into bribery allegations involving Adani Group’s founder, Gautam Adani, and key associates.
- Successful refinancing of impending bond maturities and credit facilities.
- Improvement in the group’s operational performance.
Conversely, the report warned of potential downside risks, including adverse outcomes from the ongoing SEC/DoJ indictments, any related-party transactions within the group, or aggressive debt-funded mergers, acquisitions, or capital expenditures that could weaken credit metrics.
Adani Group has strongly denied the allegations raised by U.S. authorities, labeling them as baseless.
Stabilizing After Volatility
JP Morgan’s analysis noted that initial volatility in Adani bonds, triggered by the U.S. legal actions, has now stabilized. Bond spreads widened by 100–200 basis points, with shorter-term bonds experiencing greater spread increases due to their higher dollar prices. Despite this, JP Morgan expressed varying degrees of comfort with upcoming bond maturities across Adani Ports, Adani Green, Adani Airport Holdings, Ambuja Cement entities, and Adani Energy Solutions.
The report specifically called attention to a significant offshore loan of $1.1 billion due in March 2025 for Adani Green. Although these bonds lack security backing, they are supported by solid cash flows, which JP Morgan views as a reassuring factor.
Cash Flows Over Security
Love Sharma, a representative from JP Morgan, underscored the importance of cash flows over security in the context of Adani bonds. “Even in cases where bonds are secured, the distribution allowed under covenants ensures that cash cannot be entirely classified as trapped,” Sharma stated. He further emphasized that the ability of Adani Ports to scale and grow through internal cash flows strengthens the intrinsic equity value of its operations, reducing the likelihood of credit stress.
Key Observations and Recommendations
JP Morgan reiterated that the Adani Group’s operational resilience and strong cash flow mechanisms remain pivotal to the bank’s favorable outlook on specific bonds. However, the investment bank continues to watch developments in the U.S. legal cases and broader market dynamics closely.
The report also highlighted that future actions like a quick resolution of legal charges, successful refinancing strategies, and operational improvements could provide substantial upside for Adani bonds. Conversely, adverse legal outcomes, questionable intra-group transactions, or debt-heavy growth strategies could potentially strain credit metrics and investor confidence.
The Adani Group’s ability to navigate legal challenges, manage upcoming maturities, and leverage internal cash flows will play a crucial role in determining the trajectory of its bonds in the near future. While JP Morgan’s ‘overweight’ rating on select bonds reflects optimism, the bank’s neutral and underweight ratings on others suggest a cautious approach, signaling a wait-and-watch strategy for stakeholders in this high-stakes financial scenario.
