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Mukesh Ambani’s RIL extends record borrowing spree

Reliance is expanding its existing petrochemicals plants and will build new ones to improve margins from its refining business. Photo: Abhijit Bhatlekar/Mint

Mumbai: Reliance Industries Ltd (RIL), controlled by billionaire Mukesh Ambani, is extending a record dollar debt spree to fund a $26 billion investment plan to boost earnings.

India’s biggest company got $1.75 billion in loans this month, taking this year’s overseas borrowings including an $800 million bond sale to $3.9 billion, the most among local firms, data compiled by Bloomberg show. It topped the nation’s foreign debt rankings last year too, raising $5.38 billion.

Ambani is boosting investments to expand businesses ranging from gas and petrochemicals production to telecommunications and meet $7.1 billion in repayments through 2016, after profit grew the least in four quarters in the three months ended 30 September. The extra yield on RIL’s dollar notes due 2022 over US Treasuries has dropped to 279 basis points from this year’s peak of 348 in August. The average spread on Asian securities declined 25 basis points to 285, JPMorgan Chase & Co. data show.

RIL is a must-own credit for most global or emerging-market bond investors as well as banks, Rajiv Nayar, head of capital markets origination in Mumbai at Citigroup Inc., the No. 2 arranger of international bond offerings from India this year, said in a 13 November e-mail interview. We have seen global banks as well as asset managers, insurers and sovereign wealth funds participate in size in RIL’s offerings and usually tend to hold positions for the long term.

RIL spokesman Tushar Pania didn’t respond to an e-mail seeking comment.

‘Above sovereign’

Standard and Poor’s boosted its rating for RIL’s debt in May to BBB+, the third-lowest investment grade and two levels above India’s sovereign ranking, saying the company’s investment plan will bolster its profitability. The firm’s cash reserves, which exceed its liabilities, also have helped increase its creditworthiness, according to SJS Markets Ltd.

The owner of the world’s biggest refinery complex had Rs90,540 crore ($14.3 billion) of cash and equivalents deposited in banks and mutual funds and invested in government securities as of 30 September, according to the company. Total debt was at Rs83,980 crore.

Companies which we believe can withstand sovereign distress and continue to meet their foreign-currency obligations are rated above the sovereign, Mehul Sukkawala, a Singapore- based credit analyst at S&P, said in an interview on 12 November. RIL is coming from such a strong place that it can withstand the deterioration in its financial ratios as it steps up capital spending over the next three years.

Borrowing strategy

RIL’s debt as a proportion of its earnings before interest, taxes, depreciation and amortization, or Ebitda, will stay in line with that of similarly-rated firms even after the Indian company boosts borrowings to complete planned projects, according to Sukkawala. Its net income rose 1.5% from a year earlier to Rs5,490 crore last quarter.

Our whole approach to how much debt we will take will totally be a function of how much cheap debt we can get for long maturity, Alok Agarwal, Mumbai-based chief financial officer at RIL, told reporters on 14 October. We have enough cash so that we can make choices all the time as to whether we want to spend our cash or take long-term debt. We are very conscious of not borrowing at anything above 5% in dollars.

Expansion plan

Ambani is building capacities to counter a three-year decline in gas output from RIL’s biggest field and shrinking profits from oil refining.

Production at RIL’s KG-D6 block off India’s eastern coast, billed as one of the world’s biggest gas discoveries in 2002, fell 39% to an average 26 million cubic meters a day in the year ended 31 March, the company said in an 16 April report. The company earned $7.70 for every barrel of crude it processed last quarter, compared with $9.50 a barrel a year earlier and $8.40 a barrel in the preceding three months, it said in a statement last month.

RIL is expanding its existing petrochemicals plants and will build new ones to improve margins from its refining business, Ambani told shareholders in June. It plans to drill more wells to boost slowing oil and natural gas production, open more retail stores and start a high-speed broadband service, according to him. The company is constructing a plant that will turn petroleum coke into synthetic gas, which will be used at the oil refineries to lower cost.

The gas cracker project will give RIL the highest refining margins across the globe, Hemant Dharnidharka, Bangalore-based head of credit research at SJS Markets, said in a 12 November interview. When you are the lowest cost producer, you also tend to become the most profitable. RIL has a track record of successfully implementing large projects, so the past should be a benchmark for their future projects.

Rupee rates

The explorer has increased overseas borrowings as local interest rates remained relatively high. The Reserve Bank of India’s repurchase rate of 7.75% is the highest policy rate among major Asian economies after governor Raghuram Rajan boosted it by 50 basis points, or 0.5 percentage point, in the past two months.

Yields on rupee-denominated five-year corporate debt rated AAA by Crisil Ltd., the local unit of S&P, jumped 31 basis points in the past month to 9.80%, according to data compiled by Bloomberg. The average rate on Indian companies’ dollar bonds fell two basis points to 5.85%, according to an index compiled by JPMorgan Chase & Co.

The yield on the 7.16% government notes due May 2023 rose 45 basis points in the same period to 9.02%, while the rupee weakened 2.6% to 63.12 per dollar.

Bond risk for RIL is falling from this year’s highs. The cost of credit-default swaps that protect the company’s debt against non-payment have slid to 268 basis points from as high as 302 in September, according to data provider CMA.

Since the company has been profitable, even with rising absolute levels of debt, its debt-equity ratio has stayed the same, SJS’s Dharnidharka said. It is adding cash every quarter, which gives lenders a lot of comfort. If its businesses continue to grow and generate cash, there will be no anxiety triggers. Bloomberg

                                                                                                          nagesh dubey
                                                                                                          pgdm 1st year