Asia Bi-Weekly: Flight Risk (Aug. 22 – Sept. 5)
Tue Sep 6, 2022 2:25 pm Distressed Debt  Financial Restructuring

From Reorg Asia’s Managing Editors ||
In this column, managing editors Stephen Aldred and Shasha Dai take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia.

In a market where capital is searching for the opportunity to invest outside China real estate, Azure Power Global’s troubles serve as a reminder that good governance – or at least the appearance thereof – is vital to retaining investors.

The Indian renewable energy company has held two investor calls since announcing on Aug. 5 a delay in publishing its annual results and has failed to convince many investors that it is not actually hiding something.

A large part of the problem is that information seems to have been selectively released over time, as well as management’s inability to answer critical questions – albeit in the face of an ongoing investigation.

Azure’s problems began with its botched Friday, Aug. 5 announcement to the Singapore exchange – in a document dated Monday, Aug. 1 – that it was delaying results which should have been published on Friday, July 31.

The announcement talked about “assessing” internal controls over financial reporting, and that there was a significant change in results of operations expected for the 12 months ended March 31 versus the prior 12-month period, as Azure Power is a growing company with a significant increase in operating capacity over the period.

On Aug. 8, the Monday following the announcement, the $350.1 million 5.65% due 2024 notes issued by Azure Power Solar Energy Pvt. Ltd. fell 5.25 points to 92.5/ 94.5, while the $414 million 3.575% Azure Power Energy Ltd. due 2026s fell 5.5 points to 81.5/83.5, as reported.

The company duly held a call with investors to explain things, on Aug. 18. The day after the call, bonds fell 10 points due to a perceived lack of disclosure, as reported.

Then CEO Harsh Shah declined to comment on the call when asked when the results would be published, was unable to comment on what was causing the delay and could only repeat the earlier statement about an ongoing review of internal controls and compliance framework. Shah also couldn’t comment on whether there would be material financial restatements or an adverse or qualified opinion offered on the final audit.

Investors also noted the absence from the call of key shareholders Caisse de dépôt et placement du Québec, or CDPQ, and Omers Infrastructure. CDPQ holds 50.9%, and Omers Infrastructure holds 19.4% in Azure Power.

The notes were now primed for a fall, and fall they did on Aug. 30 after the company announced on Aug. 29 that Shah had resigned – he had only been in the job since July 1 – and that an internal review supported by legal counsel and forensic accounting had identified evidence of manipulation of project data and information by certain employees, as reported. The due 2024s and 2026s both fell around 35 points in one-way trade, with the 2024s dropping to around 51/55 and the 2026s at 50/53.

Another call was announced, and duly held, on Aug. 30. The modestly positive outcome was a 2- to 4-point gain in bond prices on Sept. 1. But those gains were soon given up, as real money accounts dumped the credit the following day, as reported.

Again, the issue was a perceived lack of disclosure from company management. Board Chairman Alan Rosling, the company CFO and acting CEO this time had attended the call, although representatives from CDPQ and Omers were again absent.

Rosling in his opening remarks directly addressed the fact that given ongoing investigations relating to a whistleblower case, the company could not give a clear timeline for release of its 2022 financial results. He added that the case, involving potential data manipulation, relates to a single plant at a subsidiary.

However, in the absence of precise answers on whether restricted groups, or RGs, related to the company’s USD bonds were affected, investors have been left to rely on deduction to form their own conclusions.

When management was asked if the specific project was in the RG portfolio, they said they are in discussion with specific lenders and working with them to address their concerns. Since bondholders have not been contacted, the complaint therefore appears not to be related to RGs associated with the company’s bonds.

Management did not directly respond, however, when asked about potential covenant breaches on onshore bank loans, asserting only that they have long-term relationships with banks.

Azure Power’s delayed release of information and management’s lack of clarity on critical questions has led to a suspicion that more, and worse, could yet come.

Where there is suspicion, there will always be speculation.

And where there is speculation, there will be volatility, and in a market averse to risk and already experiencing outflows, there will be flight.

On Aug. 8, ahead of the market digesting the announcement of a delay in results, Azure Power’s due 2024 notes had been at 98.535, while the due 2026s were at 87.45.

The due 2024s were indicated flat at 67/69 on Monday, Sept. 5, while the due 2026s were at 64/66.

–Stephen Aldred, Managing Editor – Asia

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