Mumbai: In a sign that it expects liquidity to only get tighter, Reliance Industries Ltd (RIL), India’s most valuable company by market capitalization, is in the market to raise around Rs5,000 crore in debt from commercial lenders as well as a set of institutional investors, including the Life Insurance Corp. of India (LIC), mutual funds and pension funds.
The Mukesh Ambani-controlled company has already mandated two banks—ICICI Bank Ltd and Axis Bank Ltd—to separately arrange for Rs1,000 crore of syndicated loans each, and is likely to raise more, according to bank officials and company executives in the know who didn’t want to be named.
A loan syndication is when a group of banks lend to a borrower.
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Industry experts say the move by RIL, amid an intense credit crunch, could be in anticipation of tighter credit conditions in the future. The loans being raised are of medium-to-long-term maturities, according to one banker involved in the debt-raising exercise.
This is Reliance Industries’ second large-scale fund-raising this year, and the first in the local currency. Earlier this year, the company had appointed 17 banks to raise a multi-currency $1 billion five-year loan.
“We recently raised Rs1,000 crore, which included a greenshoe option of Rs500 crore, for RIL by placing it to a clutch of investors, including insurance companies, domestic pension funds and mutual funds,” said a senior Axis Bank official. He added that it was to fund “long-term working capital” requirements of the oil and gas conglomerate.
ICICI Bank is raising another Rs1,000 crore for RIL through debt instruments at coupon rates of 11.25-11.50%, according to a bank official who was part of the fund-raising effort.
A RIL spokesperson declined to comment on a questionnaire sent by Mint. Another RIL official confirmed the plans, but declined to elaborate.
Along with the broader Indian stock markets, RIL shares have taken a beating and were trading on Friday on the Bombay Stock Exchange at R1,127.35 a share, well off the 52-week high of Rs3,252.
An official at one of the financial institutions that is “reviewing the RIL proposal” said the funding syndicate could be raising as much as Rs5,000 crore.
One of the bigger investors in this debt offering will be LIC, which will subscribe to RIL’s non-convertible debentures, or NCDs—structured debt products that cannot be converted into equity of the issuing company but carry a higher rate of interest than convertible debentures.
LIC, the country’s largest insurer that is also referred to as the “lender of the last resort” by Indian companies, has sanctioned about Rs20,000 crore of debt so far this year, said a senior official at the state-run insurance firm.
A large part of this lending has been through NCDs to companies belonging to the Tata, Birla, and Mahindra and Mahindra business groups, this official said, asking not to be identified.
“They may be requiring it for the planned capital expenditure in the months ahead,” said a sector analyst with a foreign brokerage that has a “buy” rating on the stock. He also did not want to be named.
“Exploration is under way in Krishna-Godavari basin for gas reserves. More wells will be drilled and that will require money. There may be some bit of investment needed for the new Jamnagar refinery,” though it is on the verge of completion, he explained.
The 580,000 barrels of crude a day Jamnagar refinery is expected to start operations in early-2009.
Agreeing that RIL’s fund raising was an indication that companies were expecting credit to dry up further, the analyst said, “This crisis can prolong. Even if they have a (spending) plan for next year, they may as well stock the funds right now.”
The petrochemicals maker has raised funds at various points of time in the past as well, but this initiative has come in the backdrop of unprecedented liquidity squeeze.
According to RIL’s annual report for 2007-08, the company has exposure to unsecured loans worth Rs29,879.51 crore and secured loans of Rs6,600.17 crore.
Sector analysts said RIL would come under pressure as crude refining margins drop on the back of a global slowdown and additions in refining capacity across the world.
Gross refining margins (GRMs) at RIL, traditionally a few dollars higher per barrel than the Singapore Complex GRM, rose from $8.9 per barrel in fiscal 2005 to $15 per barrel in fiscal 2008, but have since fallen. It is expected to dip to $13.5 per barrel in fiscal 2009, $9 in 2010 and to $8.5 in 2011, ABN Amro Bank NV in India said in an early November report.
Kotak Securities Ltd’s analysts Sanjeev Prasad and Gurdeep Singh, who have a “reduce” rating on the RIL stock, wrote in a 17 November note to clients that chemical margins had “collapsed over the past four weeks, down 40-50%, reflecting very weak global demand”.
The report added that refining margins, too, continued to be very weak, led by weak demand for petroleum products and excess capacity, with no “scope for any significant improvement”. On 19 November, CLSA Asia Pacific cut its earnings per share estimates for RIL for fiscal 2009 by 7% to factor in lower refining margins.