New Delhi: Reliance Industries Ltd (RIL), India’s most valuable company, will look to bring down the proportion of bank debt to its overall borrowings to about half from the current 80%, while increasing its reliance on public market debt and funding from export credit agencies, a senior RIL executive said on condition of anonymity.
The executive said that borrowing from non-bank sources would help the company extend the maturity profile of its debt and bring down costs.
About 50% of the total bank debt on RIL’s books falls due in the next two-and-a-half years.
RIL’s debt outstanding at the end of December stood at Rs.72,266 crore, according to the Mukesh Ambani-led company’s October-December quarter earnings release.
A back-of-the-envelope calculation shows that if 80% of this is bank debt, then RIL’s total debt to banks is Rs.57,810 crore. If half of this falls due in the next two-and-a-half years, the amount due is Rs.28,905.20 crore.
The average borrowing cost of RIL’s debt, in dollar terms, is 3%, the RIL executive said.
On Tuesday, RIL raised $800 million through the sale of perpetual bonds carrying an interest rate of 5.875%.
This is the first time that a company anywhere in the world has been able to secure funding through perpetual bonds at an interest rate of less than 6%, the RIL executive claimed.
Bank of America-Merrill Lynch, Citigroup Global Markets Inc., Deutsche Bank AG, JP Morgan Chase and Co., Royal Bank of Scotland Group Plc and Barclays Capital Plc managed the bonds sale.
The perpetual bonds, through which RIL raised funds, have no fixed tenure for redemption and are redeemable only at the company’s option, anytime after five years. RIL will pay the interest on the bond to investors on an annual basis.
The RIL executive said the bonds attracted bids worth $3 billion but the conglomerate chose to raise a lower amount to leave headroom for further fund-raising through this route.
Investors were keen to buy the bonds since it would offer them a stable return over a long period of time and in excess of those in the international money market, the RIL executive said.
Entities that manage public money and thus look for fixed returns, such as insurance companies, evince interest in these types of offerings, the RIL executive said.
The funds raised through the perpetual bonds will be used to part fund the $12 billion capital expenditure programme RIL announced last year, which included augmentation of capacity at its integrated refining and petrochemicals complex at Jamnagar in Gujarat.
Apart from raising debt from the public market, RIL will also increasingly tap the export credit agencies in other countries that typically lend to international projects against the export of equipment from their respective countries for that project.
In the last one year, RIL had already secured $4-5 billion in such export-linked loans and will continue to do so going ahead, the RIL executive said.
“Since these loans are tied to the project implementation, they are self-financing,” the executive said.
Banks don’t lend for long tenures and borrowing through bonds will help RIL in doing away with short-term obligations of having to repay debt every now and then, said Shishir Bajpai, senior vice-president at IIFL Private Wealth Management Ltd.
“It is also helpful since companies have to usually keep their assets as collateral while borrowing from banks, whereas while fund raising through bonds is purely on the strength of the balance sheet,” Bajpai said. “I won’t be surprised if in 10 years, they further bring down the proportion of bank loans to their overall debt.”
Jagannadham Thunuguntla, head of research at SMC Global Securities Ltd, pointed out that since around 60% of RIL’s revenues come from exports—mostly in dollars—the company had a natural hedge against currency fluctuations while borrowing in the US currency.
Given the difference in interest rates in India and outside, RIL could end up saving as much as Rs.240 crore on $800 million, Thunuguntla said.
The RIL executive also pointed out that the company didn’t share the concern that some analysts have over the huge cash pile of around Rs.80,000 crore with it.
He described a sizeable portion of the cash as “core” liquidity that a company of RIL’s size and scale should keep with it at all times.
Also, the surplus cash lends RIL the comfort of announcing big-ticket investment plans such as the one currently under implementation, he said.