March 20, 2020

(Bloomberg) — In today’s plunging markets, borrowing against stock is proving expensive.

India’s Gautam Adani and his family put up an additional $1.4 billion of shares as collateral on existing debt this month, according to a Bloomberg analysis of regulatory filings through Thursday for four of his group’s companies.

In China, shareholders of at least 14 firms were asked in March to supply additional shares for collateral based on a review of filings.

In Europe, UBS Group AG and Credit Suisse Group AG asked clients to post additional collateral, and money managers in New York are readying term sheets for ultra-rich Americans to help them meet margin calls, according to people with knowledge of the proposals, who asked not to be identified discussing private matters. The price of gold, meanwhile, is set for back-to-back weekly losses as investors subject to margin pressures sell gold to raise cash.

The preparations reflect the extent to which the arrangements are coming under strain in one of the worst market declines on record. While the equity losses are less severe in Asia, the impact there has been greater so far. Shareholders of 12 companies in China had to liquidate holdings this year after breaching pledge agreements, with one case leading to an auction of stock on Alibaba Group Holding Ltd.’s Taobao platform.

“It’s much more expensive to satisfy margin calls right now,” said Michael Puleo, assistant professor of finance at Fairfield University’s Dolan School of Business in Connecticut. “While pledging allows you to monetize tremendous wealth without giving up control of your shares, if you get caught in a liquidity trap like this you may end up losing a lot of your wealth.”

Pledging is widespread in Asia, where state-owned banks dominate financial markets and high-growth companies are more common. Tycoons in China and India often turn to banks and other financial-services firms that offer cash in exchange for pledged shares. Both countries have tried curbing the practice recently. India now requires stricter disclosures on pledges, and Chinese companies started issuing risk alerts when controlling shareholders pledge most of their stakes.

“There are some disclosure requirements, but you can’t completely press things as to say where this money has actually been deployed,” said Abhishek Dangra, a senior director at S&P Global Ratings in Singapore. “When markets are going up, people are happy to leverage these pledged shares, and in these times when markets turn significantly, everyone focuses on pledged shares and margin calls.”

Ports, Power

The loans are tied to stock prices. In Adani’s case, shares of his holding company, Adani Enterprises Ltd., as well as his ports, electricity and power units, plunged this month. The declines were followed by pledges of “additional security provided for existing debt” from Adani and his relatives under agreements with lenders or security trustees, according to a filing.

His empire is facing threats on several fronts, including a legal challenge on his bid to operate an international airport, and Greta Thunberg’s opposition to his Australian coal mine. His net worth has tumbled by almost half this year amid a market-wide rout, according to calculations by the Bloomberg Billionaires Index, which deducts the value of his pledged shares.

Adani didn’t reply to requests for comment.

Pledged shares are part of the tycoon toolkit in the U.S., too.

This week, an entity controlled by Eldorado Resorts Inc.’s founding Carano family sold $28.7 million of stock in the casino operator to meet a margin call to satisfy a bank loan, filings show.

Read more: Eldorado Founders Hit With Margin Call Ahead of Caesars Deal

For years, Tesla Inc.’s Elon Musk and Oracle Corp.’s Larry Ellison have pledged some of their holdings. About a quarter of Ellison’s stake in Oracle secured personal indebtedness as of Sept. 20, according to a proxy filing. That has helped him maintain a lavish lifestyle over the years, including ownership of an entire Hawaiian island, without diluting his position.

Musk had pledged about 40% of his Tesla stake at the end of 2018, according to a filing last year. Another tech tycoon, Robert Pera, pledged as much as 25% of his stake in Ubiquiti Inc. in 2018, the same year he increased his holding in the Memphis Grizzlies basketball team. Tesla and Oracle didn’t respond to requests for comment. Ubiquiti declined to comment.

Possible Risks

Even in today’s market turmoil, margin calls on such long-established pledges are unlikely. Ubiquiti’s shares, for instance, are still worth almost twice as much as they were when the pledges were disclosed. Still, the filings lay out possible risks.

“These loans have or will have various requirements to repay all or portion of the loan upon the occurrence of various events, including when the price of common stock goes below certain specified levels,” Ubiquiti said in its 2018 proxy, which noted that Pera may need to sell stock to meet those requirements. In case of a default, the lender could sell the pledged shares “without limitation” to reduce his loan balances, the company said.

A recent case in the U.K. offers an example of how pledged shares can crush fortunes. On Dec. 10, Bavaguthu Raghuram Shetty owned stakes valued at $2.4 billion in hospital operator NMC Health Plc and financial-services provider Finablr Plc. A critical report by short seller Carson Block’s Muddy Waters led to a series of revelations, including Shetty’s previously undisclosed pledged shares. A spokesman for Shetty declined to comment.

At least one bank has sold some of those shares to enforce security over a loan for Shetty, and trading in both companies was suspended after their shares plummeted.

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