India 2005 - All about Reliance
For the casual observer, loan market activity from India this year could seem like its all about one borrower – Reliance Group. Such has been the regularity and prolificacy of the group’s borrowing that it has not only dominated the loan markets but has managed to raise funds successfully amid a family dispute that raged on for more than half a year. Prakash Chakravarti reports.
Indian loan volumes are setting new records each year and the Reliance Group has played its part in this trend. Reliance companies accounted for US$1.4bn of the total US$6bn raised from the loan markets by Indian credits during the first seven months of 2005 and with another US$1bn-plus in loans for Reliance entities still in the market in August Reliance is by far the most active borrower from India this year. To put those figures into perspective, Reliance borrowings – including the deals still open in the market – amount to more than the entire volume of the Indian loan markets in 2003.
Yet it is all change behind the scenes at Reliance. The once-mighty conglomerate has been split down the middle following the resolution to a spat between brothers Mukesh and Anil, Ambani family members and controlling shareholders of the Reliance Group. As part of the resolution, a demerger plan announced in early August will see the power, telecom and financial services subsidiaries of Reliance Industries (RIL) going to Anil, leaving the rest of RIL and Indian Petrochemicals Corp (IPCL) with Mukesh.
While any split of a company might ordinarily make lenders and investors cautious, it seems to have had the opposite effect on RIL. The demerger is viewed favourably for RIL as it effectively becomes a ‘pure play’ oil, gas and petrochemicals company. Previously, analysts believed that RIL’s share price had suffered from the ‘conglomerate discount’ demanded by investors, a discount that took into account exposure to a diversity of businesses such as power and telecom. Following the demerger, RIL can focus on its core competencies, something that bankers welcome. “From a lender’s perspective, the demerger is positive for RIL as it brings the stable businesses under one umbrella and throws out the capital-hungry Reliance Energy and Reliance Infocomm,” said one banker in Singapore.
Not everyone sees it as such undiluted good news, however. Plans to double the petroleum refining capacity at its Jamnagar plant to 60m tonnes per year may have gone some way to assuage fears for RIL’s prospects (without the Energy and Infocomm growth stories), but the cost of this expansion – around Rs250bn (US$5.74bn) – coupled with RIL’s foray into biotechnology has raised some concerns.
As well as the capital demands of the biotechnology sector, the cyclical nature of the petrochemical industry is also a worry. Bankers are sanguine about RIL’s prospects on this count, however, seeing RIL as well insulated from any downturn. “The petrochemical industry continues to exhibit strength with no visible signs of a downtrend. RIL has effectively used the petrochemical up-cycle to strengthen and deleverage its balance sheet and improve its debt profile,” said Amit Khattar, principal, syndicated capital markets, Asia Pacific at Banc of America Securities Asia.
RIL’s strong balance sheet – cash at March 31, 2005 was US$3.6bn – a net debt-to-Ebitda ratio of less than 1 and net profits of Rs23.10bn for the quarter ended June 2005, implies that it has the financial wherewithal to embark into oil exploration (and any other projects) without further borrowing. A preference for keeping a large cash holding on its balance sheet means, however, that it is likely to be back to the market. It should have ready access as well.
“RIL has nurtured and expanded its banking relationships and today has one of the widest lender relationships amongst Indian credits,” said Khattar.
Its expansive lender relationships also explains why RIL has not tapped the offshore bond markets in recent years. With asset-hungry lenders falling over themselves to book quality assets, RIL – rated Ba2/BB+ (Moody’s/S&P) – can easily raise cheaper funds from loans rather than bond. RIL’s frequent and successful visits to the loan markets this year are testimony to that fact.
In addition to raising US$700m through two five-year transactions in March and June, RIL is back again with a US$348m three-year. While the deal in March was a trailblazer, becoming India’s most successful loan in terms of bank participation, the second transaction in June was equally well received – 34 banks lent to each facility.
The March loan paid a top level all-in of 90bp over Libor, while the June deal came 10bp inside that. Given the recent pricing compression in the Indian loan markets, RIL’s latest US$348m three-year is expected to pay slightly north of 50bp over Libor.