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Energy Mergers Spur Oil India, GAIL Debut Bonds: India Credit

Energy Mergers Spur Oil India, GAIL Debut Bonds
India’s biggest energy companies are lining up their first overseas bond sales, seeking cheaper funding to compete with Chinese rivals for resources from Australia to Brazil and Canada. Photographer: Pankaj Nangia/Bloomberg

India’s biggest energy companies are lining up their first overseas bond sales, seeking cheaper funding to compete with Chinese rivals for resources from Australia to Brazil and Canada.

GAIL India Ltd., Asia’s most-profitable gas utility, and state-owned explorer Oil India Ltd. are considering debut foreign-currency debt issues to help fund mergers and acquisitions, their finance directors said. While Indian dollar debt yields have risen to 4.94 percent on average from 4.29 percent a month ago, they’re still 3.7 percentage points less than five-year rupee rates, HSBC Holdings Plc indexes and data compiled by Bloomberg show.

“The resource-related emerging-market issuers are large enough to be credible in the bond market, so we would be interested in those companies if they offer M&A plays,” said Jani Kurppa, a bond investor in Helsinki at EQ Asset Management Ltd., which manages $1.4 billion. “There are only a few Indian companies with U.S. dollar bonds and that limits the country allocation in our portfolio.”

Prime Minister Manmohan Singh ordered companies in March to step up purchases abroad to bolster energy security and feed the fastest economic expansion in two and a half years. Indian corporations with $25 billion of cash reserves are outmuscled by China including Hong Kong, where corporates held $104 billion as of June 30, a Moody’s Investors Service survey of 121 non-bank entities showed.

Rising Acquisitions

Companies including Reliance Industries Ltd. have announced $8.1 billion of acquisitions in basic materials, energy and utility assets outside the country since the global credit crisis in September 2008, according to Bloomberg data. Petrochina Co. and other Chinese companies bought $73.6 billion of assets over the same period.

Elsewhere in India’s credit market, government bonds rallied last week and the cost to protect against losses on debt of State Bank of India, a state-controlled lender that is the nearest measure for sovereign debt, fell. The cost of one-year interest-rate swaps, a fixed payment made to receive floating rates, declined.

“Economic data has provided some relief to the bond market in the past week,” said Namrata Padhye, a Mumbai-based fixed-income strategist at IDBI Gilts Ltd., a primary dealer that underwrites government debt sales. “Easing food inflation and weak industrial growth have reinforced expectations that the central bank won’t continue its aggressive policy approach.”

Yields Drop

The yield on India’s May 2020 notes dropped two basis points to 8.01 percent as of 12:13 p.m. in Mumbai, narrowing the gap with Treasuries to 512 basis points. The spread was 567, or 5.67 percentage points, on Oct. 20, the widest since 2001, Bloomberg data shows.

Rupee-denominated government bonds returned 4.1 percent this year, the third-worst among 10 local-currency debt markets outside Japan, HSBC indexes show. The Reserve Bank of India has raised its repurchase rate six times in 2010 by a cumulative 150 basis points to 6.25 percent.

The cost to protect against losses on debt of State Bank of India declined 2.6 basis points to 164.4 basis points on Nov. 19, according to credit-default swaps prices from New York-based CMA. The contracts reached a one-month high of 169.4 on Nov. 17.

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

Rate Swaps

The cost of one-year interest-rate swaps, a fixed payment made to receive floating rates, was little changed at 6.72 percent, compared with 6.735 percent on Nov. 12. The rate is up from this year’s low of 4.78 percent in May 6.

India’s rupee fell 1.5 percent against the dollar in the past month as the yield advantage narrowed, trimming its gains for the year to 2.8 percent. The currency was little changed at 45.29 per dollar from Nov. 19.

The nation’s foreign-exchange reserves fell $1.9 billion to $298.3 billion in the week ended Nov. 12, the central bank said Nov. 19. The change in foreign-currency assets is partly because of the change in the value of the dollar against the euro, yen and other currencies during the period, the central bank said. Reserves, which comprise currencies, gold and special drawing rights with the IMF, climbed $11.9 billion in the past year.

‘Actively Studying’

The government formed a panel in July to find ways to employ its reserves to help state-owned companies bid for energy assets. India’s $1.3 trillion economy, Asia’s fourth-largest, depends on imports for more than 75 percent of its oil and gas needs. Cash reserves rose almost 60 percent between the end of 2008 and mid-2010 as operating performances improved and debt-raising, Moody’s said in a report.

Oil India, based in the northeastern state of Assam, is “actively studying” assets in Australia, South America and Africa and hopes to complete a deal soon as it seeks a credit rating, Finance Director T.K. Ananth Kumar said.

“We want to leverage our balance sheet by taking on some debt,” he said in a phone interview on Nov. 18. “Interest rates overseas are cheaper than in India so a foreign-currency debt makes sense.”

New Delhi-based GAIL, which topped Tokyo Gas Co. as Asia’s best gas utility in Platts Top 250 Companies based on returns on invested capital, is looking for overseas assets and “will consider bond sales among its funding options,” Finance Director R.K. Goel said in an interview on Nov. 18.


Indian Oil Corp., the biggest refiner and based in New Delhi, plans to sell an additional $500 million of overseas bonds by March, Finance Director Serangulam V. Narasimhan said Nov. 13. Hindustan Petroleum Corp. is seeking $200 million of loans, Finance Director B. Mukherjee said a day earlier.

“Indian companies are more value-oriented in their acquisitions as they give more significance to profitability,” Jal Irani, who tracks energy companies at Macquarie Securities Ltd. in Mumbai, said in a phone interview. “These energy companies are well-funded, have good credit strength and should be able to tap overseas bond markets without any problem.”

The yield on Indian Oil’s 4.75 percent bond due in 2015 increased one basis point to 3.58 percent, according to Royal Bank of Scotland Group Plc. The rate climbed 18 basis points last week. It reached as low as 2.854 percent on Oct. 8.

“I would welcome any Indian companies to the market,” said Kurppa at EQ Asset, which owns debt sold by ICICI Bank Ltd., State Bank of India Ltd. and state oil companies from Malaysia, Brazil and Russia. “There hasn’t been much supply.”

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