These are hard times for emerging markets borrowers, but there are always exceptions. And they do not get any more exceptional than the Reliance group and, on this occasion, Reliance Petroleum.
Reliance Petroleum’s US$500m loan, signed in April, illustrates the group’s appeal. In the middle of a global credit crunch, Reliance Petroleum secured a seven-year loan with no fewer than 19 banks at the MLA level – a telling sign of its popularity.
“The biggest reason [for taking part] was the profile of the deal,” said Tajinder Singh Setia at ABN AMRO in India, one of the 19 MLAs. “The fact that it was from the Reliance group ensured wider participation.”
The loan will finance the second phase of a 580,000 barrel a day refinery in Jamnagar, Gujarat. It follows a US$2bn hybrid corporate and project finance loan signed in October 2006 which financed the first phase. The latest deal was effectively an extension of the first, with an average life of six years, and what Setia calls a “plain” structure. It paid 155bp over Libor, which he described as “very competitive in this environment.”
Initially six banks were mandated on the financing: Banc of America Securities Asia, Bank of Tokyo-Mitsubishi UFJ, HSBC, Mizuho Corporate Finance, Sumitomo Mitsui Banking and West LB. It is understood that a signing among those six took place on March 19, and that Reliance Petroleum had been keen to do so before March 31 because of India’s external commercial borrowing guidelines. In any fiscal year (in this case running from April 1 to March 31) an Indian company can seek approval from the Reserve Bank of India to borrow up to US$500m in offshore funds. Sealing that approval before March 31 freed up the company to borrow that amount again from the offshore markets in the new fiscal year if necessary, perhaps to refinance existing deals in brighter market conditions.
However it was after March 31 that the broader banking group – ABN AMRO, Arab Bank, Banco Bilbao Vizcaya Argentaria, Bank of Nova Scotia, Calyon, Credit Industriel et Commercial, DnB NORBank, KBC Bank, KfW, Natixis, NordLB, SG and Standard Chartered – came in to the deal, signing it in Beijing on April 28. With all of those banks participating, there was no need to hold a general syndication.
On first sight the absence of American houses bar Banc of America is striking, although Setia says the lenders do not look dramatically different to the way they would have done before the credit crunch. “I wouldn’t say the banks are significantly different. It’s just the participation of banks has been widened,” he said. This naturally reflects banks wishing to spread risk.
While the scale of the lending group looks unwieldy, it is not uncommon, as was illustrated by a deal from another part of the Reliance Group, Reliance Industries, when it launched a US$1.2bn five-year bullet loan in July with 19 banks in its arranger group and, by late August, 24 banks in total. “In the space of three months they have raised US$1.7bn,” said Setia. “That’s a significant achievement given the credit conditions. It is unlikely many borrowers could do that in this market, as is evidenced by the number of deals from the Indian corporate sector. There have been just a handful of deals in the last six to eight months.”
There are likely to be still more. Market talk is of a US$2bn reserve-based lending deal, which is a project finance facility backed by Reliance’s known oil reserves. Also, Reliance Petroleum itself will at some stage refinance both of its loans ahead of step-up margins from the original financing coming into effect.
The plant the Reliance Petroleum loan will finance is expected to be groundbreaking. It will be able to convert heavy crude oil into fuels sufficiently clean to be sold in jurisdictions worldwide, which should increase gross refining margins. As a general rule, so-called sweet (or light) crude is easier and cheaper to refine than sour (heavy) crude, but the fact that far fewer petroleum companies can convert sour crude to a level that meets strict western standards gives them pricing power. It is also ahead of schedule: it was originally slated for project completion by the end of December but is likely to be ready at least two months earlier.