Pimco Sees M&A as ONGC Returns to Dollar Offerings
The state-owned company’s overseas unit, ONGC Videsh Ltd., issued $500 million of 10-year notes yesterday at 210 basis points over U.S. Treasuries and $300 million of five-year debt at a premium of 190 basis points, according to data compiled by Bloomberg. China National Petroleum Corp. and China Petroleum & Chemical Corp. (386) sold 2023 notes this month at around 160.
“The region’s energy appetite can only expand over the secular horizon as these economies continue to develop and standards of living rise,” Raja Mukherji, Hong Kong-based head of Asian credit research at Pacific Investment Management Co., said in an e-mail interview yesterday. “To meet increasing demand, many Indian oil and gas companies have not only become frequent buyers of foreign assets, they have also regularly tapped the international capital markets.”
Indian companies including Reliance Industries Ltd. (RIL) have more than tripled overseas debt sales this year to $8.8 billion as borrowing costs fell to record lows, providing ONGC a platform as it mounts bids for assets from Azerbaijan to Kazakhstan and Mozambique to fuel Asia’s third-largest economy. Pimco, manager of the world’s biggest bond fund, expects most of the new fundraising will be primarily used for overseas mergers and acquisitions, according to Mukherji.
The latest bond sale will help ONGC Videsh, which invests in and operates the parent’s assets abroad, refinance an $870 million bridge loan that it took to fund the purchase of a stake in an oil field and related pipeline in Azerbaijan in March. The acquisition will increase the New Delhi-based company’s overseas reserves by 9 percent and production by about 11 percent.
“Our revenue from this field will be in dollars, so for us borrowing in that currency makes sense,” D.K. Sarraf, managing director at ONGC Videsh, said by telephone yesterday. “We are coming to the dollar-bond market after many years and may return if we need money for other acquisitions.”
China National Petroleum sold $2 billion of notes April 9 in three tranches that each had record-low coupons, according to data compiled by Bloomberg. China’s largest oil company’s offering included $750 million in 10-year (GIND10YR) securities with a 3.4 percent coupon. China Petroleum & Chemical, Asia’s biggest oil refiner, raised $3.5 billion April 18 in the second-largest sale of dollar bonds in Asia outside of Japan. This included $1.25 billion of 10-year debt at 3.125 percent, the data show.
Average dollar yields for Indian issuers touched an all- time low of 3.805 percent March 18 and are at 3.92 percent, HSBC Holdings Plc indexes show. A similar gauge for all Asian debt is at 3.46 percent.
“Chinese companies are able to borrow at cheaper rates because China has a lower risk than India and a better credit rating,” Hemant Dharnidharka, the head of credit research at SJS Markets Ltd. in Bangalore, said in in a phone interview yesterday. “ONGC Videsh’s yield is still attractive.”
China’s bond risk is lower than India’s. The cost to insure government notes from Asia’s largest economy using five-year credit-default swaps was at 72 basis points last week in New York, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A similar gauge for State Bank of India, considered a proxy for the sovereign, was 200.
China is rated Aa3, by Moody’s Investors Service and AA-, the fourth highest investment grade, by Standard and Poor’s. India is ranked Baa3 by Moody’s and BBB- by S&P, the lowest investment grades. ONGC is rated Baa2 by Moody’s and BBB- by S&P. CNPC and China Petroleum & Chemical are assessed at Aa3 by Moody’s, the fourth-highest non-speculative rank.
S&P and Fitch Ratings last year said that India’s credit ratings may be downgraded to junk, citing slowing growth and current-account and budget deficits. The nation’s gross domestic product rose 5 percent in the fiscal year ended March 31, the weakest pace since 2003, the statistics agency estimates.
Prime Minister Manmohan Singh’s government cut fuel subsidies in September, opened up industries including aviation and retailing to foreigners and reduced taxes on companies’ overseas debt to boost investment and economic growth. Singh’s biggest policy push in a decade was complemented by monetary easing by the Reserve Bank of India, with two interest-rate cuts this year.
Central bank Governor Duvvuri Subbarao will lower the RBI’s 7.5 percent repurchase rate by 25 basis points, or 0.25 percentage point, at a May 3 review, according to 25 of 31 economists surveyed by Bloomberg. Singh and Subbarao’s policies have helped India’s sovereign bonds rally the most among the four-largest emerging markets, including Brazil, Russia and China.
Indian debt returned 5.2 percent in 2013, the second highest in Asia, compared with 13.5 percent for the Philippines, according to HSBC indexes. The yield on 10-year government notes in India dropped 29 points this year to 7.76 percent, offering an extra yield of 610 basis points over similar-maturity U.S. Treasuries. The rate touched a 33-month low of 7.738 percent April 23. The rupee rose 0.1 percent today to 54.191 against the dollar.
“Last year, the sentiment had been bad for a while for India, so spreads were wide and companies held back,” Philipp Good, who helps manage $2 billion of global bonds in Zurich at Fisch Asset Management Ltd., said in an interview yesterday. “It seems like the downgrade pressure is less imminent at the moment, but we remain cautious on the sovereign and therefore on the corporates too.”
Reliance Industries and state-owned GAIL India Ltd. (GAIL) are among Indian energy companies that have acquired at least $10.3 billion of overseas oil and gas asset in the past five years compared with $90.7 billion by Chinese firms, according to data compiled by Bloomberg.
ONGC, which is mandated by the government to help meet the nation’s fuel needs, plans to spend 11 trillion rupees ($203 billion) by 2030 to increase production at home and abroad. Demand in Asia’s second-biggest energy consumer is forecast to more than double by 2035, according to the U.S. Energy Information Administration. India imports 80 percent of its oil requirements.
“In general, among Asian national oil companies, we prefer the ones with large upstream assets, limited exposure to downstream assets, and flexibility to access funding,” said Pimco’s Mukherji.
Efforts to buy global assets are gathering momentum after a lull following ONGC’s completion of the $2.2 billion purchase in 2009 of Imperial Energy Corp., a U.K. company with fields in Siberia where production declined quickly.
The explorer announced in November a $5 billion acquisition of a 8.4 percent stake in Kazakhstan’s Kashagan project, touted as the biggest oil find since the 1960s when it was discovered beneath the Caspian Sea in 2000. Kazakhstan’s government is considering preempting that deal, and selling the stake to a Chinese company instead, people with direct knowledge of the matter said this month.
ONGC and partner Oil India Ltd. (OINL) are also among bidders proceeding to a second round in the sale of a stake in a Mozambique gas field that could be worth at least $5 billion, according to people with knowledge of the matter.
Companies may benefit from Finance Minister Palaniappan Chidambaram’s efforts to woo capital to fund the nation’s record current-account deficit.
Chidambaram, who estimates that the nation needs more than $75 billion by March 2014 to bridge the gap in the broadest measure of trade, met investors in the U.S. and Canada this month. He completed a tour of the world’s biggest financial centers that included similar visits to Hong Kong, Singapore and Europe earlier this year.
“Indian corporate debt is becoming attractive,” said Dharnidharka of SJS Markets. “The finance minister himself has been pitching the nation to foreign investors.”