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Billionaire Brothers Debt Recast Boosts Essar Bond: India Credit

A planned recast of $4.8 billion of debt by billionaire brothers Shashikant and Ravikant Ruia helped drive the biggest rally in Essar Energy Plc’s (ESSR) convertible bonds since they were issued two years ago.

The 4.25 percent notes due 2016 of the Indian refiner and power producer, part of the Ruias’ Essar Group, surged 19 percent this quarter, reducing the yield by 580 basis points to a one-year low of 15.47 percent, data compiled by Bloomberg show. The group will extend overseas-loan maturities and switch some of its rupee liabilities into dollar-based ones, according to two people with direct knowledge of the matter.

Indian companies borrowed $8.7 billion abroad last quarter, the most in a year, as central bank Governor Duvvuri Subbarao held the highest interest rates in the region. The average yield on Indian dollar debt slid 246 basis points to 4.37 percent in 2012, HSBC Holdings Plc data show. That’s less than half the rate for five-year AAA rupee corporate bonds and approaching the 4.14 percent for Chinese U.S. currency notes.

“This is something that plays a huge role in increasing confidence,” Hemant Dharnidharka, head of credit research at SJS Markets Ltd. in Bangalore, said in an interview yesterday. “In the current benign market, it’s much easier to go ahead and refinance. So if they refinance now for about five years, the management can focus on the business rather than worry where the funds will come from.”

‘Pruning Cost’

Essar is reorganizing liabilities to reduce the debt burden accumulated to finance part of its $18 billion expansion since 2008, the people said, asking not to be identified because the matter is private.

“The swapping of rupee debt with foreign debt is a beginning toward” aligning financing costs with global levels, Essar’s Mumbai-based spokesman Manish Kedia said yesterday by telephone. “These efforts are neither driven by any compulsion to refinance or restructure but by the strategy of pruning financing cost as much as possible.”

India boosted the cap on foreign borrowings that don’t need approvals to $750 million from $500 million in September 2011 and said it may permit the total annual limit on overseas borrowing to exceed $30 billion “on a case-by-case” basis.

Selling Shares

The Ruias may sell shares in the U.S. steel unit Minnesota Steel Industries LLC, or in other group companies including Essar Energy, Essar Ports Ltd. (ESRS) and Essar Shipping Ltd. (ESL) to reduce obligations, the people said. The group’s owners plan to offer some of their shares in Essar Oil (ESOIL) Ltd., Essar Shipping and Essar Ports to comply with regulatory norms and have no plans to cut their holding in Essar Energy, Kedia said in an e-mail last week.

Essar, which bought Minnesota Steel in 2007, is in talks with banks for an initial public offering for the U.S. unit, Chief Executive Officer Prashant Ruia said in June.

Net debt, or liabilities minus cash, at Essar Energy rose to 7 billion rupees ($128 million) in March from 3.4 billion rupees two years earlier, data compiled by Bloomberg show.

Essar Steel Ltd., another group company, has total debt of about 230 billion rupees, the people said, after more than doubling capacity to 10 million metric tons at Hazira in Gujarat state and building a pellet plant in the eastern state of Odisha. Essar Oil increased its refining capacity to 20 million tons from 10.5 million tons this year.

Debt at Peak

“Right now, debt levels are at a peak,” said Puneet Bhatia, an analyst at ratings assessor Credit Analysis & Research Ltd., or CARE, in Mumbai. “With the commencement of new projects and expected incremental cash flow, resources available for debt servicing stand augmented.”

The Reserve Bank of India has approved Essar Steel’s proposal to switch about $430 million of its rupee loans into dollar debt, according to the people. The company also plans to borrow the maximum $750 million loan allowed by the central bank under the automatic approval route for importing equipment, one person said. The steelmaker failed to pay overseas bondholders in 1999 to become the first Indian company to default on an international debt.

Essar Oil, a unit of Essar Energy, said on Oct. 9 it may raise as much as $1.5 billion in overseas loans after receiving the RBI’s approval. The refiner had 156.3 billion rupees in liabilities and 20.6 billion rupees of cash and equivalents as of March 31, according to data compiled by Bloomberg.

Cheaper Funds

“Essar Oil has received the RBI’s approval to raise up to $1.5 billion in external commercial borrowings,” Rabin Ghosh, a Mumbai-based spokesman for Essar Oil, said in an e-mail yesterday. “These will be used to swap our rupee debt to foreign debt which is cheaper by about five to six percentage points.”

RBI’s Subbarao has held the repurchase rate at 8 percent since a 50 basis point cut in April that was the only reduction since 2009. Central bank rates are at 3 percent in China, 2.75 percent in South Korea and 5.75 percent in Indonesia. Ten-year sovereign bond yields are at 8.20 percent in India, compared with 3.52 percent in China and 1.62 percent in the U.S.

The yield on the 8.15 percent debt due June 2022 climbed one basis point to 8.20 percent today, offering an extra amount of 658 basis points over Treasuries, as the rupee rose 0.4 percent to 54.875 per dollar. Rupee-denominated sovereign notes returned 8.7 percent this year, trailing the 11.5 percent earned by Indonesian securities in the best performance among Asia’s 10 biggest markets, HSBC indexes show.

Default Swaps

Bond risk for Indian companies has slid this year. The average cost of five-year credit-default swaps insuring against non-payment by seven local issuers declined 156 basis points to 305, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in privately negotiated markets.

Essar Energy’s equity-linked notes are headed for a fourth month of gains. The group is aiming at a 30 percent jump in revenue in three years to $35 billion as it taps demand for infrastructure in Asia’s third-largest economy, Prashant Ruia said in June.

“Essar had defaulted many years ago, but thereafter they have been doing quite OK,” said SJS’s Dharnidharka. “Their businesses are generating cash. Earlier the concern was how they are going to go ahead but fortunately for them, in the last few years their businesses have picked up. That’s a big positive.”

To contact the reporter on this story: Pratish Narayanan in Mumbai at pnarayanan9@bloomberg.net

To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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