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Sunday, 17 December 2017

IFR Top 250 2007: Setting the standard

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India’s largest private sector enterprise, Reliance Group, has a history of innovative capital markets transactions. And with its major companies involved in sizeable capital expenditure programs, that flow of deals is set to keep coming. Rob Davies reports.

Boasting a market capitalisation of US$74bn and annual revenues in excess of US$25bn, Reliance Group – whose interests include oil and gas production, petroleum refining, petrochemicals, textiles and retail – is among India’s most active borrowers.

Last year saw the group, whose major companies are Reliance Industries, Reliance Petroleum, Indian Petrochemicals Corp. and Reliance Industrial Infrastructure, establish a number of benchmarks. These included Reliance Industries’ ¥17.5bn 10-year Euroyen bond issue in March – the first of its type by any Asian borrower since 1997. The notes priced at the tight end of guidance, paying 90bp over yen swaps, despite being launched into a volatile market.

September saw the same company complete a US$300m US private placement bond offering, opening the market for Indian borrowers and demonstrating another example of Reliance’s borrowing savvy.

Securing interest from buy-and-hold investors allowed the company to provide the necessary documentation to lower withholding taxes to 10%. While spreads for the 10 and 12-year tranches were nominally around 10bp outside comparables in the public space, Reliance saved an estimated 100bp in withholding tax associated with such offerings. The company subsequently raised a further US$250m by going this route.

Meanwhile, in August Reliance Petroleum completed a US$2bn syndicated loan as part of a US$6bn exercise to fund construction of a greenfield refinery. Attracting the participation of 52 banks, the hybrid corporate/project financing was the largest offshore loan by an Indian company. The inclusion of a 10-year tranche was another first. The deal carried an average life of 6.6 years and all-in costs of 121 points over Libor.

That such a sizeable deal could attract so overwhelming a response, especially considering that overall loan volumes in India amounted to just US$2.5bn in 2003, shows how far the market has come in the past few years – and illustrates Reliance’s part in that.

Debt financing has been at the core of group expansion plans. According to chief financial officer Alok Agarwal, any major borrowing has to fulfil two principal objectives.

“Our intrinsic business – petrochemicals and oil and gas investment – has become increasingly dollarised,” he said. “The first objective is to continue to have a liability mix in sync with the business. Over the years, we have successfully managed to mix borrowings, evolving from rupee to US dollar transactions. Approximately three quarters of our borrowings are in US dollars, and I would expect that trend to continue.

“Secondly, we look at maturity and the global benchmarks for investment-grade companies, particularly our peers in industrials, so that our borrowing costs reflect our market position. Additionally, we pay close attention to the absolute level/cost of borrowing over an interest rate cycle, enabling us to determine the optimum time to issue.”

Given Reliance’s successful capital market ventures in the past year, which Agarwal estimates to have raised US$5bn–US$6bn across the group, it is not surprising he is positive about the current borrowing environment.

“This speaks volumes for Reliance Group’s track record and the acceptance it commands among investors. We are established as the pre-eminent Indian borrower in the offshore markets bar none," he said.

Stretching the curve beyond 12 years is likely to be the group’s major target over the next year.

“Our strategy will primarily be focused on the long-end. To date, Reliance Industries and Reliance Petroleum have between them issued four deals with 10-year plus maturities, including three syndicated loans (including two deals of US$2bn each), two US private placement deals plus a Euroyen issue,” said Agarwal.

“The objective has been to get final maturities of between 10 and 12 years, with average life of between six and seven years. I would expect the group to be involved in some interesting bond market deals over the next year, and we are exploring various options for deals of between 10 and 15-year maturities.”

As to which group companies have major financings planned, Agarwal would only say that Reliance was currently re-evaluating borrowing needs across the group. He would, however, confirm Reliance Industries – involved in a US$5bn–US$6bn oil and gas capital expenditure programme – was the prime candidate to explore longer-dated bond opportunities.

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