Reliance Industries Ltd. (RIL) is taking advantage of tumbling bond risk to borrow the most abroad in five years to finance expansion, even as profits slump.
The firm controlled by billionaire Mukesh Ambani, Asia’s second-richest man, signed a 13-year loan equivalent to $2 billion, backed by credit insurer Euler Hermes SA, with nine banks including Citigroup Inc. and Commerzbank AG, it said last week. That’s the highest such borrowing by India’s biggest company since May 2007, data compiled by Bloomberg show.
Confidence in the owner of the world’s largest oil-refining complex surged this year as the company reported cash that surpassed debt. The cost of insuring Reliance’s bonds for a year against nonpayment using credit-default swaps tumbled 154 basis points since Dec. 31 to 124, according to data provider CMA. Such contracts dropped 11 basis points to 34 for Royal Dutch Shell Plc and fell 39 to 36 for Valero Energy Corp.
“Reliance’s credit metrics are strong at the moment, so there is room for extra spending and borrowing,” Jani Kurppa, a fund manager in Helsinki at EQ Asset Management Ltd. that manages $4.7 billion in debt including Reliance’s, said in an interview on May 14. “The company probably sees more stable margins in petrochemicals in the future, and this will help make up for lower gas output.”
Reliance, which reported last month the steepest drop in profit since 2008, is planning an $8 billion expansion of its petrochemicals business, betting Indian demand for materials used to make plastics and polyester will help counter weak global fuel sales. The proposed spending will be the most since the firm completed its second oil refinery in 2008. The company seeks the loan to buy equipment from Germany as part of the petrochemicals expansion, it said in the statement.
The company’s bond risk fell in each of the first four months of 2012, the longest stretch since October 2010, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. Still, one-year default-swap prices have doubled from a year ago as Europe’s debt crisis hurt demand for emerging-market assets.
The Mumbai-based explorer and refiner had 702.5 billion rupees ($13 billion) of cash and equivalents as of March 31, surpassing its 682.6 billion rupees of liabilities, according to an April 20 statement. The company’s reserve funds rose after it sold a 30 percent stake in 21 oil and gas fields to London-based BP Plc last year for $7.2 billion.
Tushar Pania, a spokesman for Reliance, didn’t comment on the company’s plans to raise more debt for expansion projects.
Reliance’s 5.4 percent dollar-denominated note due 2022 offered an extra yield of 376 basis points, or 3.76 percentage points, over similar-maturity U.S. Treasuries, according to data compiled by Bloomberg. The spread on state-owned Bank of Baroda’s similar-maturity debt was 356 basis points.
‘One of the Strongest’
“We believe Reliance is well-diversified and one of the strongest credits in India,” Claudia von Waldkirch, who helps manage about $1 billion of global bonds including Reliance’s debt at Fisch Asset Management AG in Zurich, said in an interview yesterday. “The relative value of Reliance’s bonds is one of the most attractive in India.”
The Ambani-controlled company is set to benefit from a drop in foreign-currency borrowing costs for Indian companies as it raises the loan. Average dollar debt rates for local borrowers fell 113 basis points this year to 5.70 percent, according to indexes compiled by HSBC Holdings Plc. The benchmark cost of borrowing rupees for AAA rated Indian companies is 9.45 percent, according to data compiled by Bloomberg.
Domestic companies raised $66 billion in the past two years in foreign-currency loans and bond sales, up from $31.6 billion in the prior period, as the Reserve Bank of India raised local interest rates by a record amount to contain inflation, data compiled by Bloomberg show.
Reserve Bank Governor Duvvuri Subbarao raised the repurchase rate by 375 basis points between March 2010 and October 2011, before cutting it last month by 50 basis points to 8 percent in the first reduction in three years.
Ten-year sovereign bond yields climbed 104 basis points in the past 24 months. The extra yield on the notes over U.S. Treasuries widened 268 basis points to 674, according to data compiled by Bloomberg. The yield on the benchmark 8.79 percent government debt due November 2021 fell one basis point to 8.49 percent today, according to the central bank’s trading system. The rupee slid 0.7 percent to 54.185 per dollar.
Indian sovereign notes returned 8.4 percent in the past year, beating the 4.8 percent earned by Chinese securities, according to indexes compiled by HSBC.
Profits Under Pressure
Reliance’s net income fell 21 percent to 42.4 billion rupees in the three months ended March 31 from a year earlier, according to a stock exchange filing on April 20. The company reported a profit of $7.6 for every barrel of crude it processed into fuels in the quarter, compared with $9.2 a barrel a year earlier. Its shares lost 2.7 percent this year even as the benchmark BSE India Sensitive Index (SENSEX) advanced 3.8 percent.
“Profitability will continue to be under pressure till gas production and refining profits start improving,” Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which manages about $1.1 billion in emerging-market assets, said in an interview on May 14. “The company’s three main businesses aren’t doing well at the moment.”
Gas production at the company’s KG-D6 deepwater block off India’s eastern coast was 34.7 million cubic meters a day last quarter, 14 percent lower than the preceding three months, according to Batlivala & Karani Securities Pvt. Output peaked at about 60 million cubic meters a day in June 2010 and has declined because of technical difficulties and a drop in pressure at the reservoir, according to Reliance.
Reliance plans to almost double its capacity to manufacture petrochemicals including propylene and purified terephthalic acid, Religare Institutional Research said in an April 21 report. The increased output may meet about 55 percent of estimated local demand in the year ending March 2016, according to the report. A quarter of Reliance’s sales in the year ended March 2011 were from petrochemicals, data compiled by Bloomberg show.
Reliance also plans to build a plant that will turn petroleum coke, an oil byproduct produced at the refinery’s coker unit, into synthesis gas, which is cheaper than imported liquefied natural gas, according to the company. Using synthesis gas, or syngas, will reduce cost of refining and add about $3 a barrel to the company’s refining margins, according to Religare.
The company, which also operates retail stores and owns a cricket team, is diversifying into telecommunications, media, financial services and hotels. Chairman Ambani, worth $20 billion, lost his position as Asia’s richest man to Li Ka-Shing after the Hong Kong-based Chairman of Hutchison Whampoa Ltd.’s wealth increased 2.4 percent this year, according to data compiled by Bloomberg.
“In the current environment when it’s capable of raising money cheaper, it has gone ahead and borrowed for expanding the petrochemical business,” Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets Ltd., said on May 11. “That allows Reliance to use its cash to grow new businesses. The company’s cash-flow generation is very high. Even after raising this loan, in a couple of quarters, they will again become net debt-free.”
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