Hedge Funds Hunting for Adani Bargains Are Using This Playbook

Hedge funds that previously stayed clear of stocks and bonds linked to Gautam Adani's empire are jumping in after a more than $100 billion wipeout in the group's market value.

Battered down bond prices and heightened price swings on many Adani securities have drawn in new investors, according to hedge fund managers, traders and investors, who asked not to be identified discussing private details. Some said the strong assets and cash flows of Adani ports, power and green energy companies would ensure debt is serviced and that investors would be shielded from any losses resulting from any future defaults.

Meantime, others are looking at potential opportunities to arbitrage secured against unsecured debt, or between debt and equities, the people said. At one point, about $117 billion was erased from the value of billionaire Adani's companies.

Here's an examination of some of the potential trading strategies:

Bond Bargains

One key trade follows declines in Adani-related bonds. Previously deemed unattractive due to their tight yields, those dollar bonds are now drawing the attention of special situations and distressed investors, some as first-time investors in these securities.

Most of Adani ports's bonds traded below 80 cents as of late Tuesday, as did some from Adani renewable energy. Oaktree Capital Management and Davidson Kempner Capital Management were among buyers of Adani debt, people familiar with matter have told Bloomberg.

Bonds of Adani Ports & Special Economic Zone Ltd., Adani Electricity Mumbai Ltd. and Adani Transmission Ltd. are backed by hard assets and strong cash flows verifiable by third parties, investors said. The latter two operate in regulated industries.

The more levered Adani Green Energy Ltd. has French oil giant TotalEnergies SE as a strategic equity investor. Investors said they expect its leverage ratio to drop upon completion of projects under development, which could make it more attractive.

Their level of indebtedness is reasonable for infrastructure companies, said John Stover, a Singapore-based portfolio manager at Tribeca Investment Partners, which oversees about $3 billion. There is also the belief that the Hindenburg report's damages will be largely contained in public equity valuations, Stover said.

Such buying has already helped drive a bond price rebound.

"I think it's probably leveled out for now," Stover said. "My guess is you'll see a stable to slightly rising trend from here. I think the volatility has died down barring some big piece of news."

Range Trading

Stover would watch on as US and European investors woke up to negative headlines that triggered selling in Adani bonds. Once the carnage had pushed prices low enough, he and other buyers in the region would start to scoop them back up.

For negative news on Asian companies "whether it's political or potential risks around inter-company or related-party transactions, you generally see Europe and US sellers," he said. "Asia's more comfortable with those risks just because it's more commonplace in Asia and people on the ground here understand the history behind the groups and why they've been constructed this way and have gone in with eyes open."

He said he's been buying and then selling to lock in profit after the instruments bounce five to six cents on the dollar. That's contributed to an 11% return this year for his Tribeca Vanda Asia Credit fund. Given the latest drop in yields, much of the appeal is now gone, he said.

Equities Versus Bonds

After the initial flurry of selling, shares such as Adani Ports are recouping some of their losses. Some investors pointed to the potential upside in the stock relative to the bonds, with equity now having the chance for a bigger gain. Its wide analyst coverage also adds to its appeal. One way to execute this trade would be to short the bonds and pair that with a long equity position.

Company Structure

Adani Green Energy has debt at both the holding company level and at the operating company level. Some investors say they perceive bonds in the latter category to be safer as they are backed with assets that are ringfenced from being used to service other debts.

One option is to place a long bet on the operating company debt and short the holding company bonds. Adani Green Energy holding company debt due in September 2024 touched a low of 63.7 cents on Feb. 2, having traded at an average of 91 cents over the last 12 months, according to data compiled by Bloomberg. Secured bonds issued by the operating company with a December 2024 maturity are still trading above 92 cents on the dollar.

Of course, those investors who believe Adani Green Energy's bonds will weather the current crisis can place the opposite trade. They would bet other traders have become too pessimistic by positioning for price gains on the holding company debt, while putting a bearish wager on the operating vehicle's paper. The 2024 holding company debt has rebounded to above 80 cents from an earlier trough.

Investors in this trade would lose some potential upside from simply owning the holding company debt and would incur shorting costs. In the case of a bankruptcy, they would lose money as they are expected to recover a smaller percentage of their money.