Reliance Bonds Yielding Less Than Mattel as Ambani Seeks Gas: India Credit

Reliance Industries Ltd., in selling 30-year bonds at yields lower than U.S. companies with comparable debt ratings, shows how investor perceptions of India’s corporations have turned around in two years.

India’s biggest company by market value sold 6.25 percent 2040 bonds at 240 basis points more than U.S. Treasuries last week. Mattel Inc., which has the same rating as Reliance and is the world’s largest toymaker, priced $250 million of 6.2 percent bonds due October 2040 last month at an extra yield of 250 basis points. The average spread for Indian dollar corporate bonds has dropped to 359 basis points from as high as 2,036 in 2008 during the global financial crisis, HSBC Holdings Plc indexes show.

Billionaire Chairman Mukesh Ambani is being offered a discount by investors confident that Mumbai-based Reliance will find demand for its energy resources in Asia’s second-fastest- growing major economy. While nations from Brazil to Thailand impose taxes to control investment inflows, India in September raised its limit for foreigners buying rupee bonds.

“In a relatively short time, Indian companies are becoming highly globalized,” said Seth Freeman, chief executive officer of San Francisco-based EM Capital Management LLC, which focuses on emerging markets including India and Pakistan. “For a whole basket of reasons besides the rate Reliance is getting, companies may look at dollar debt.”

Indian international bond sales have climbed to $6 billion this year from $1.79 billion in all of last year, data compiled by Bloomberg show.

Pimco Likes India

New Delhi-based Rural Electrification Corp., India’s state- controlled lender to power projects, may sell $500 million in debt in November, Finance Director Hari Das Khunteta said in a phone interview this month. Essar Energy Plc may issue its first foreign-currency bonds next year, Chief Financial Officer P. Sampath said in a separate interview. Mumbai-based Axis Bank Ltd. hired five lenders to sell $500 million of dollar bonds, a person familiar with the matter said yesterday, asking not to be identified because the details are private.

Pacific Investment Management Co., which runs the $252 billion Total Return Fund from Newport Beach, California, is buying “high quality” securities in emerging markets such as India, Chief Operating Officer Douglas Hodge said in an Oct. 14 interview.

“We look at the risk-adjusted returns in the developed world versus the emerging bond markets,” Hodge said in Seoul. “We continue to find value in emerging markets.”

‘Critical’ Industry

Ambani, who already owns India’s largest natural gas field, has shown he’s ready to make overseas acquisitions to create a global energy group. The company has spent $3.4 billion since April to buy shale gas assets in the U.S. after failing to purchase LyondellBasell Industries AF in a deal that would have valued the Rotterdam, Netherlands-based chemicals maker at $14.5 billion, and losing a bid for oil sands assets in Canada.

Reliance plans to spend at least $8.4 billion over the next decade in two shale gas ventures in the U.S., according to a presentation it made to investors in July. The company, which also sold dollar bonds in 1997 and 2007, raised $1.5 billion in India’s biggest-ever corporate bond sale.

The demand was “a function of having a track record in the market and being such a big company, and probably because they are in a critical industry where it is easy to understand that they are going to grow,” said EM Capital’s Freeman, who declined to say how much he manages.

Moody’s Investors Service rates both Reliance Industries and El Segundo, California-based Mattel Baa2, the second-lowest investment grade, and Standard & Poor’s ranks their debt BBB.

Bond Comparison

The bonds also compare with similar-rated securities from U.S. insurers Mutual of Omaha Insurance Co. and Lincoln National Corp. Radnor, Pennsylvania-based Lincoln National’s $500 million of 7 percent notes due in June 2040 sold at a spread of 280 basis points, or 2.8 percentage points. Mutual of Omaha, based in Nebraska, offered $300 million of 6.95 percent notes maturing in October 2040 at a spread of 340 basis points.

The extra yield investors demand to hold India’s top-rated corporate bonds over government debt has fallen to 61 basis points from 86 at the start of the year.

The difference in yields between Indian government debt due in a decade and U.S. Treasuries widened 26 basis points this month to 559. The gap has grown from 375 at the end of 2009.

Default Swaps

India’s 10-year bonds gained for the first time in four days yesterday on speculation yields at the highest level in two years will attract investors. The yield on the government’s 7.8 percent note due May 2020 fell 2 basis points to 8.08 percent.

The rupee was little changed at 44.345 a dollar yesterday, after retreating from a two-year high. The currency has climbed 4.9 percent this year.

The cost of protecting Reliance debt from non-payment rose to 169 basis points from 166 at the start of the month, prices on five-year credit-default swaps from CMA show.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

“Reliance did have the advantage of getting to investors early, but I think the demand is such that the window for similar offerings is still wide open,” said Vikas Pershad, Chicago-based chief executive officer at Veda Investments LLC. “Not every company will have the appeal to foreign investors that Reliance has, but I still do think this augurs well for other Indian companies as they look to raise capital abroad.”

Chemicals Exports

Reliance can tap overseas sales from its refineries to repay its offshore debt. The company exported fuel and chemicals worth 328.5 billion rupees ($7.4 billion) in the quarter ended June 30 compared with 161.5 billion rupees a year earlier, a presentation made by the company to analysts on July 27 showed. Exports climbed after the company started operating a newer 580,000 barrels-a-day refinery at Jamnagar in the western state of Gujarat at full capacity.

The crude-processing plant, which started in December 2008, and the adjacent, older 660,000 barrels-a-day facility together make up the world’s biggest refining complex at a single location, according to the company’s website.

Corporate bonds worldwide have rallied this year, returning investors 9 percent on average, according to Bank of America Corp. data, as the world economy’s outlook improved and risk appetite revived. India has seen unprecedented overseas demand for bonds.

“This is a fantastic time for Indian companies to issue foreign currency bonds,” said EM Capital’s Freeman. “What will become more interesting to observe is how, say, the BSE 100 companies or the Nifty 50 companies, if they go out and borrow, the ones smaller than Reliance, what kind of rating they are going to get.”