Why cash-rich RIL continues to load up on dollar debt

Reliance Industries Ltd (RIL) is never one to refuse a loan. Even when it is rolling in cash. This is why despite being a net zero-debt company, it continues to raise loans on favourable terms, the latest one being a perpetual dollar bond.

India’s largest conglomerate has a cash pile of over Rs 75,000 crore, but it has used this to wangle a great deal from lenders to raise Rs 4,300 crore in long-term debt ( $800 million) through perpetual dollar bonds. The money will part-fund the Rs 1 lakh crore capital expenditure programme RIL announced last year. The programme includes expanding its petrochemicals business and ramping up oil and gas exploration.

The bond market abroad is awash with liquidity and rates are low. Little wonder that RIL is eager to lock in long-dated funding. Perpetual bonds don’t have to be repaid, and at current low rates they can help bring down RIL’s average debt costs. The company raised the capital at a coupon rate of 5.875 percent, making it the first issuance of perpetual bonds below six percent in the world. The only risk with dollar-denominated debt is adverse movements in the rupee-dollar rate, but then Reliance has a natural hedge since over 60 percent of its turnover comes from dollar-earning exports.

Perpetual bonds are instruments with no maturity date.This means it is up to the company discretion to redeem them anytime after five years. In order to compensate for the fact that investors can never redeem them, companies pay a higher rate than other bonds with a similar credit profile.

RIL will pay the interest on the bond to investors on an annual basis. Bond holders can always sell the bond in the secondary market when they need the money.

Perpetual bonds help RIL in shoring up capital and doing away with short-term obligations of repaying debt every now and then.

This is the fifth time that RIL is raising long-term debt this fiscal. So far, it has raised $4 billion from overseas in the current financial year, including $1.5 billion last October by its US subsidiary.

Reliance’s total debt as of 31 December 2012 was Rs 72,266 crore, compared with Rs 68,259 crore as on 31 March 2012.The company plans on increasing its proportion of public debt in its overall debt to 50 percent from 20 percent now.

A Mint report today highlights that Reliance is looking to bring down its bank debt by increasing its reliance on public market debt and funding from export credit agencies.

Almost 50 percent of the total bank debt on RIL’s books falls due in the next two-and-a-half years so the idea is to expand the company’s capital base with an extended maturity period.

Raising money through non-bank sources will only help it bring down costs as it improves the maturity profile of its debt.

Standard & Poor’s ratings services had assigned its ‘BBB’ long-term issue rating to Reliance’s unsecured perpetual notes while Moody’s has assigned a Baa2 rating. The two ratings imply stability but also indicate that the instrument is medium grade with some speculative element and moderate credit risk.

RIL is testing the waters with the current bond issue and going forward it would look at more of such really long-terms funds.

The bonds were sold globally, and received bids worth $3 billion. However, the focus was Asian investors comprising HNIs and insurance companies, who lapped over 50 percent of the book, a company official was quoted as saying by PTI.

Bank of America, Citi, HSBC, Barclays, Deutsche Bank, JP Morgan and RBS were book-running lead managers to the issue.