After Citi and Credit Suisse, British bank Standard Chartered (StanChart) has stopped giving loans on the back of dollar bonds floated by companies of the Adani Group which is battling allegations of price manipulation and accounting fraud by US short-seller Hindenburg Research.
Some of the relationship managers of StanChart, which has a significant presence in Asia, have informed their private wealth clients in the region’s large markets like Singapore that the bank would not accept these papers as collaterals for margin loans, one such customer told. The decision, albeit a temporary one, was taken Friday amid volatility in Adani bond prices.
“The decision,” said a senior banker, familiar with the development, “is a function of the price movements of the underlying pledged stock and is often triggered by an algorithmic system. StanChart has a comparatively tiny exposure to these securities.” “So, it’s not a material event for the bank… But such safeguards exist to protect the bank and the clients,” said the person.
A margin loan leverage can work in two ways: an investor can pledge bonds, say worth $10 million, and receive a loan of $6.7 million; or, a bank can fund a large part, about 67% of new investment of $10 million in a bond, by lending $6.7 million with the investor chipping in the balance $3.7 million.
The interest on such loans varies from 0.5 and 1.5 percentage points over the Secured Overnight Financing Rate (SOFR) depending on the underlying paper and the creditworthiness of a client. SOFR, used as a loan pricing benchmark in the money market, reflects the cost of borrowing cash overnight against collateral of treasury securities. The leverage window helps to improve the liquidity of the pledged security.
Taking a security out of the margin loan facility does not necessarily mean that the lending bank believes that the issuer would default on the interest or the repayment. “However, fluctuation in prices of bonds amid questions of governance of the group makes it a less stable paper for margin loans,” said another person.
For Adani Group, bond and equity investors as well as local and overseas credit rating agencies are trying to figure out whether the companies would be able to refinance its foreign currency debts over the next one year. In the first rating action since the Hindenburg report, international rater S&P changed the ‘outlook’ on Adani Ports and Adani Electricity to ‘negative’ from ‘stable’ last Friday, citing deterioration in credit profile due to governance risks and funding challenges.
The first bank to stop margin loan facility was Credit Suisse. Citi followed soon after.
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