Ambani Lowers Capital Cost With Reliance Perpetual

Billionaire Mukesh Ambani’s Reliance Industries Ltd. is cutting its cost of capital after selling dollar-denominated bonds with no maturity, the second such issuance by an Indian non-bank entity.

The nation’s biggest company by market value sold $800 million of undated notes at 5.875 percent, the energy explorer said in a Jan. 29 statement. Reliance’s approximate weighted average cost of debt and equity is 9.7 percent, data compiled by Bloomberg show. Hong Kong-based Cheung Kong Holdings Ltd., controlled by Asia’s richest man Li Ka-Shing, sold $500 million of perpetual debt at 5.375 percent on Jan. 16, the data show.

Reliance, which reported its first quarterly profit increase in two years on Jan. 18, sold the eternal bonds after yields on Indian dollar notes slumped to a record low this month. It plans to sell more debt in the U.S. currency with maturity exceeding 30 years and cut bank loans to 50 percent of total liabilities in five years from 80 percent, said a company official who asked not to be identified citing internal rules.

“Reliance is being opportunistic and making the most of the current market with cheaper rates,” Hemant Dharnidharka, head of credit research at SJS Markets Ltd. in Bangalore, said by telephone yesterday. “This way they will succeed in bringing down their cost of capital. Cheung Kong Holdings got a better rate because they have more diversified business interests.”

Net-Debt Free

The Mumbai-based company holds more cash than debt and is the third Asian borrower to issue perpetual bonds this year, bringing the total to $2 billion, or 54 percent of 2012 sales, according to data compiled by Bloomberg. It last sold 10-year dollar bonds in February through its unit Reliance Holdings USA Inc. with a 5.4 percent coupon, the data show.

The 5.875 percent coupon on Reliance’s eternal debt, which can be bought back after five years, will be fixed for life, according to the data. The company wants to extend the average duration of its existing debt, which is about 5 years at present, said the official who can’t be identified.

The explorer and oil refiner received around $3 billion in orders for its note, according to the company’s statement. Investors in Asia bought 53 percent of the offering, Europe’s fund managers 27 percent with U.S. investors taking up the remaining 20 percent. Private banks bought 53 percent of the securities and institutional investors 47 percent.

‘Fantastic Deal’

“This is a fantastic deal for the company to be able to secure lifetime funding at sub-6 percent,” said Mark Reade, a Hong Kong-based credit desk analyst at Credit Agricole SA. “The borrower was able to lock-in funding at a time when Treasuries are close to all-time lows.”

The yield on U.S. 10-year Treasuries is at 1.98 percent, compared with the 2.90 percent average for the past five years, data compiled by Bloomberg show. Yields on India’s dollar bonds fell by 40 basis points this year to an all-time low of 3.9 percent on Jan. 25, HSBC Holdings Plc indexes show, while the average for Asia rose three basis points in the same period.

Cheung Kong’s undated bond was trading at 91.5 cents on the dollar, while Reliance’s note was at 95.3 cents at 11:09 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. Both were sold at par and are similar in structure. The Hong Kong-based conglomerate’s investments include ports, power, real estate and telecommunications.

Agile Property Holdings Ltd., a Chinese developer, sold perpetual notes at a 8.25 percent coupon on Jan. 11, data compiled by Bloomberg show. Petron Corp., the Philippines’ largest oil company, sold $500 million of bonds with no maturity date at a 7.5 percent yield yesterday, the data show.

Ballarpur Industries

Ballarpur Industries Ltd., a paper manufacturer, sold $200 million of undated notes at 9.75 percent in August 2011, the data show, the first such sale by an Indian non-bank company.

Indian companies sold a record $9.8 billion of notes overseas in 2012 as the Federal Reserve’s asset purchases to revive growth in the world’s largest economy and monetary easing by global central banks boosted flows into emerging-market bond funds to a record last year, according to EPFR Global.

Issuers sought cheaper alternatives to rupee-denominated debt as the worst inflation among the largest emerging markets forced the Reserve Bank of India to keep benchmark borrowing costs at the highest level among major Asian economies.

Governor Duvvuri Subbarao cut the repurchase rate to 7.75 percent from 8 percent on Jan. 29, the first reduction since April as he seeks to jump-start an economy growing at the slowest pace in a decade.

RBI Forecasts

The RBI cut its economic growth forecast for the year through March 31 to 5.5 percent from 5.8 percent and lowered the inflation projection to 6.8 percent from 7.5 percent. Gains in benchmark wholesale prices moderated to a three-year low of 7.18 percent in December, official data show.

Rupee-denominated sovereign bonds returned 11.3 percent in the past year, the most among Asia’s 10 biggest local-currency debt markets tracked by HSBC Holdings Plc.

The yield on the benchmark 10-year government debt has slid 16 basis points, or 0.16 percentage point this month, narrowing the difference over similar-maturity U.S. Treasuries to 591, data compiled by Bloomberg show. The yield on the 8.15 percent note due June 2022 was little changed at 7.89 percent today, while the rupee rose 0.4 percent to 53.07 per dollar.

Reliance, which owns the world’s largest oil refining complex, reported a profit increase last quarter, reversing four consecutive quarters on lower net income. The company had cash and equivalents of 809.62 billion rupees ($15 billion) and 722.66 billion rupees of debt outstanding as of Dec. 31, according to the earnings statement.

Default Risk

The cost of insuring Reliance’s debt for five years against non-payment using credit-default swaps, fell to a 17-month low of 186 on Jan. 10 and was at 199 on Jan. 30, according to data provider CMA, which is owned by McGraw-Hill Cos. The contracts 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.

Bond risk in India has fallen every month since September, when Prime Minister Manmohan Singh’s government unveiled its biggest growth push in a decade, which included opening industries such as retail and aviation to foreign investment and measures to curb subsidies.

Five-year credit-default swaps on State Bank of India’s debt, considered a proxy for the sovereign by some investors slid 144 basis points in the second half of 2012 to 226, and was at 204 on Jan. 30, CMA data show.

‘Aggressive Pricing’

“The aggressive pricing of Reliance will be an encouragement for Indian borrowers,” Raj Kothari, fixed-income trader at Sun Global Investment Ltd. in London, said in a Jan. 29 telephone interview. “The opening up of the economy and strong government decisions are improving investor confidence.”

Reliance is spending $8 billion to boost petrochemical capacity and $4 billion on a plant to make combustible gas to power its refineries, according to a presentation on the company’s website. Reliance said Jan. 18 it earned $9.6 for every barrel of crude it processed last quarter, compared with $6.8 a year earlier.

“The combination of liquidity and demand for fundamentally strong papers is driving spreads and yields down alike, and that helped Reliance to tap the market at an aggressive price,” Cornel Bruhin, who helps manage $3.9 billion at MainFirst Schweiz AG in Zurich, said in a Jan. 29 telephone interview. “We believe the demand is strong and is going to drive yields down, providing an opportunity for other borrowers.”

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