How the ‘Madoffs of Manhattan’ can unravel Gautam Adani’s empire — explained

Never mind that Hindenburg’s founder Nathan Anderson had worked with Harry Markopolos, the analyst who uncovered Bernie Madoff’s Ponzi scheme that robbed investors of as much as $65 billion. If anything, that puts Anderson in an anti-Madoff camp. Even as Hindenburg responded swiftly to Adani’s rebuttal, saying it failed to answer “62 of our 88 questions,” it is nonetheless worth pondering what the short seller might focus on next to win over investors’ minds and money.

Despite its good reputation in New York’s finance circles, the Hindenburg name by no means translates into automatic success in Asia. Other conglomerates, such as China’s HNA Group and China Evergrande Group, had survived years of high-profile short sellers’ attacks and failed only when the political wind turned against them.

One of the research firm’s major allegations is stock manipulation. According to Hindenburg, Adani insiders already own more than 75% of four publicly traded subsidiaries with the aid of offshore shell entities, thereby triggering delisting according to India’s securities laws.

But that accusation alone is not enough to convince investors who are deciding what to do with their Adani holdings. For years, foreign investors had complained about Hong Kong-listed Evergrande’s limited free float and concentrated ownership, which it made it difficult for them to short the developer’s shares — to little avail. Evergrande only became distressed when Beijing’s regulators cracked their whips, prompting domestic banks to stop lending to the builder.

As such, it will all depend on whether Hindenburg has enough global sway to shut down at least one of Adani’s key borrowing channels. Industrial companies are capital-intensive. If they can’t refinance, even good firms can go bad. Five of seven listed Adani companies have reported current ratios below 1, indicating they don’t have enough liquid assets to cover their short-term liabilities. That means Adani’s ability to refinance debt is all the more important.

On that front, Hindenburg might just have an outsized voice, in that about 30% of Adani’s borrowings are denominated in foreign currencies. The group has more than $10 billion dollar bonds outstanding, with an investor base including global asset managers such as Lord Abbett & Co., BlackRock Inc. and Goldman Sachs Group, according to Bloomberg data.

Already, a few dollar notes including debt of Adani Electricity Mumbai Ltd., a subsidiary with investment-grade rating, have fallen to distressed levels, indicating mounting markets concerns about Adani’s creditworthiness. Hindenburg’s report is renewing a bond rout which began in September after Fitch Group unit CreditSights published a report raising concerns over the group’s leverage.

With Evergrande’s spectacular fall still recent in their memory, global bond traders can be jittery. For instance, Adani Ports & Special Economic Zone Ltd., the group’s biggest dollar-note issuer, is rated at BBB-, the lowest level of the investment grade. What if credit ratings agencies downgrade the company to junk, purely because of their belief that market selloffs can shut down financing options, as they’ve done to Chinese real estate developers? This fear alone could cause foreign bond buyers to flee.

So far, the Adani short is still largely an equity story. But as we’ve seen in China, spillovers into credit markets can be swift. One bad margin call on pledged shares, one credit rating downgrade, and everything unravels. Hindenburg still has some convincing to do.