Bloomberg News

Ambani Bonds Posting Best Month on Cash From BP: India Credit

July 29, 2011

July 29 (Bloomberg) -- Reliance Industries Ltd.’s bonds are posting their best monthly advance on speculation proceeds from selling stakes in oil and gas fields to BP Plc will help India’s biggest company by market value cut debt and boost profits.

Yields on the Mumbai-based energy producer’s 4.5 percent dollar notes due October 2020 fell 43 basis points, or 0.43 percentage point, in July, the most since they were sold nine months ago, to 5.014 percent, according to ING Groep NV prices. Beijing-based Cnooc Ltd.’s similar-maturity 4.25 percent debt yield fell by 26 and the yield on 6 percent bonds due 2017 from SK Innovation Co. of Seoul rose by three, data compiled by Bloomberg show.

Billionaire Mukesh Ambani’s Reliance will get $7.2 billion from London-based BP for the stakes after receiving government approval last week. After India raised interest rates to the highest level since 2008, the cash will help Reliance cut its 670.4 billion rupees ($15.2 billion) of debt and reduce issuance amid the steepest rupee borrowing costs in more than two years, according to Aberdeen Asset Management Plc.

“Reliance has the luxury and the advantage of having a large cash pile, which gives them flexibility in this difficult financial environment,” Pierre Faddoul, a Singapore-based credit analyst at Aberdeen Asset Management that oversees $301 billion, said by phone yesterday. “And the BP deal will help give them technology to raise output.”

Rising Rates

The Reserve Bank of India has raised its repurchase rate by a total 175 basis points this year as it seeks to quell inflation at 9.44 percent, the highest rate of the so-called BRIC nations. The cost of issuing rupee debt for five years by Indian companies rated BBB by Standard & Poor’s, their second- lowest investment grade, has climbed 105 basis points this year to 12.216 percent, the highest level since March 2009, according to data compiled by Bloomberg.

The cost of insuring Reliance’s five-year debt against default has dropped as the company’s net income rose 17 percent from a year earlier to 56.6 billion rupees in the three months ended June, according to a statement released this week.

Five-year credit-default swaps on Reliance’s bonds have dropped to 185.1 basis points from this year’s high of 196.1 reached on June 27, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The cost to protect against a default of State Bank of India, which some investors view as a proxy for sovereign debt, has climbed seven basis points this month to 194.5.

Accelerate Development

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point equals $1,000 a year on a contract protecting $10 million of debt for five years.

BP agreed in February to buy a 30 percent interest in 23 blocks operated by Reliance. The size of the deal may swell to $9 billion should output at the blocks increase, the Indian company said in a Feb. 21 statement. BP’s investment will accelerate development and production from Reliance’s fields, Chairman Ambani said on Feb. 22.

Manoj Warrier, a Mumbai-based spokesman for Reliance, declined to comment on the bonds’ performance when contacted by mobile phone yesterday.

“The BP deal gives them a better chance of increasing gas output,” Mehul P. Sukkawala, a Mumbai-based credit analyst at S&P, said in an interview on July 27. “This will help improve their credit profile.” S&P rates the company BBB, one level above the firm’s rating for India.

Positive Outlook

The ratings service raised the credit outlook on Reliance to positive from stable after the refiner announced the BP deal in February. Europe’s second-biggest oil firm has expertise in deep-water drilling that Reliance could use to reverse a drop in gas output, according to S&P. Production at Reliance’s KG-D6 field, India’s largest gas deposit, fell 18 percent to 156.2 billion cubic feet in the three months ended June.

The difference in yields between five-year Indian corporate bonds rated BBB and similar-maturity government debt has dropped to 378 basis points from this year’s high of 418 reached on April 25, according to data compiled by Bloomberg.

India’s 10-year government bonds dropped for a third day yesterday. The yield on the 7.8 percent notes due April 2021 rose two basis points to 8.47 percent, according to the central bank’s trading system. The yield is 550 basis points higher than for similar-maturity U.S. Treasuries.

Rupee bonds have earned 3.5 percent in the past year, beating the returns on five of the 10 Asian local-currency debt indexes compiled by HSBC Holdings Plc.

‘Fairly Opaque’

Investors are concerned that Reliance may not be able to reverse the declining output at the KG-D6 field, according to research firm Sanford C. Bernstein & Co. The company’s ability to protect its refining margins is also crucial, said Neil Beveridge, a senior oil and gas analyst at Sanford C. Bernstein in Hong Kong. Reliance’s profit from turning crude into fuels in the three months to June 30 was $10.30 a barrel, the highest in almost three years.

“Their guidance on gas production remains fairly opaque,” Beveridge said in an interview yesterday. “Refining margins are at the top of the cycle and Reliance will be depending a lot on exploration and production for earnings growth. The big question is, when will that happen?”

The rupee has advanced 1.4 percent against the dollar in July, the biggest monthly gain since March. The currency was little changed at 44.08 per dollar today after touching a three- year high of 43.8550 on July 27, according to data compiled by Bloomberg.

The yield on Reliance’s 2020 notes will drop to about 4 percent by March, according to Raj Kothari, a London-based bond trader at Sun Global Investments Ltd.

“Bond yields will fall further considering they have all this surplus cash and plans to reduce debt,” he said.

--With assistance from Sam Nagarajan in New Delhi. Editors: John Chacko, Ven Ram

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net


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