Billionaire Ambani Turns to China to Cut Costs

Billionaire Anil Ambani’s companies borrowed $3 billion from lenders including China Development Bank Corp. to gain cheaper funding after rupee borrowing costs climbed the most in four years.

Reliance Communications Ltd., India’s second-largest mobile phone operator, will borrow a part of $1.9 billion from the state-owned bank, which lends to support China’s policy aims, using $1.3 billion to repay existing credits, the company said Dec. 15. Reliance Power Ltd. will borrow $1.1 billion to help fund an electricity plant. Neither disclosed the cost of the loans. The yield on India’s top-rated five-year rupee corporate debt rose 73 basis points to 8.95 percent this year, the biggest gain since 2006, according to data compiled by Bloomberg.

“Reliance has to repay the debt and the China loans are an immediate solution because interest rates there are 1 to 3 percent cheaper,” Taina Erajuuri, who helps manage the equivalent of $1.2 billion of emerging-market stocks at Helsinki-based Fim Asset Management, including Indian stocks, said in an interview Dec. 21.

India has the highest 10-year government bond yields among Asia’s major economies, and the nation’s companies face rising borrowing costs in rupees and dollars. China Development Bank sold one-year debt last month at a 2.61 percent coupon, letting it support the global expansion of Chinese companies. The bank provided a $10 billion loan to Brazil’s state-run oil company Petroleo Brasileiro SA last year, and a $1 billion credit line in March to Russian bank VEB.

Average dollar yields in India have climbed to 5.17 percent from 4.27 percent in October, according to HSBC Holdings Plc indexes.

Chinese Equipment

The Reliance Anil Dhirubhai Ambani Group is increasing debt to generate 33 times more power and expand its phone connections nationwide. Anil, 51, gained control of telecoms, power and financial services and Mukesh Ambani, 53, kept the oil, gas and refinery and chemicals businesses after the brothers split Reliance Industries Ltd. in 2005. Both agreed to use the Reliance name.

Anil’s group plans to buy phone equipment from ZTE Corp. and Huawei Technologies Co. after India’s government allowed Chinese vendors to supply phone companies in July subject to security inspections.

Chinese companies signed $16 billion of deals with Indian businesses during Premier Wen Jiabao’s visit last week. Adani Power Ltd. placed orders for $3.6 billion of equipment with Chinese companies, while SRM Energy Ltd. gave $1.4 billion of contracts during the visit.

Rate Comparison

China Development Bank, which has lent more than $120 billion to fund China’s overseas projects, is expanding its loans to Reliance as Indian banks’ costs jump amid a cash crunch. The lender opened a Moscow branch in September after setting up an office in Cairo last year. Bank officials didn’t respond yesterday to two telephone calls and a faxed request.

Chinese banks pay less than half as much as their Indian counterparts to borrow even after lending rates more than doubled this year. The Shanghai interbank rate for three-month loans advanced 16 basis points, or 0.16 percentage point, to 4.11 percent yesterday, up from 1.83 percent at the start of 2010, according to the National Interbank Funding Center. Indian three-month rates rose 25 basis points to 9.06 percent on Dec. 21 after starting the year at 4.60 percent, according to the India National Stock Exchange. They fell 6 basis points yesterday.

Treasury Spread

India’s rupee has advanced 1.8 percent this month, the biggest gain among Asia’s 10 most-traded currencies outside the yen. The rupee rose to a one-week high of 45.10 per dollar yesterday. The central bank said Dec. 16 it will repurchase 480 billion rupees ($10.6 billion) of debt over the next month to ease the cash crunch.

The yield on India’s benchmark 10-year bonds climbed 35 basis points this year and reached a two-year high on Dec. 6. Yields on the 7.8 percent bonds maturing in May 2020 held near the lowest in two months yesterday at 7.94 percent.

The rate is 464 basis points more than U.S. Treasuries, compared with 375 at the end of last year.

The cost of protecting the debt of government-owned State Bank of India, which some investors use as a proxy for the nation, increased 1 basis point to 159 on Dec. 21. The cost dropped to an eight-month low of 155 basis points on Dec. 16, according to CMA prices.

Interest Rates

India’s central bank kept interest rates unchanged on Dec. 16 after six increases this year. Reserve Bank of India Governor Duvvuri Subbarao said Dec. 16 that inflation is above the “comfort level.” The RBI aims to slow inflation to 4 percent to 4.5 percent from an 11-month low of 7.48 percent in November, he said Dec. 9.

“The RBI will raise interest rates by 25 basis points in January as inflation will continue to be a problem next year,” Fim Asset’s Erajuuri said. “Banks are going to be very prudent next year with lending. Even if they lend they could demand high interest rates from companies with high debt.”

Reliance Communications, based in Mumbai, has 378 billion rupees in gross debt, its latest results show. Reliance Power, also based in Mumbai, has about 531 billion rupees of bonds and loans, with some maturing in 2049, data compiled by Bloomberg show.

Generator Order

The electricity producer ordered $10 billion of coal-fired generators from Shanghai Electric Group Co. for plants in India, where supply falls short, curtailing growth. For the deal, Reliance Power signed a $12 billion financing agreement with Chinese banks in Shanghai, according to an Oct. 28 statement.

China’s investment in power plants may fall “slightly” this year to 660 billion yuan ($99 billion) as the government invests in cleaner energy sources, the China Electricity Council said in an Oct. 29 statement.

Ambani’s plan to cut debt by selling Reliance Communications’ mobile-phone transmission towers to GTL Infrastructure Ltd. was derailed in September after the companies failed to reach a deal.

India’s telecommunications equipment market faces government scrutiny because of security concerns spurred by mobile phone companies’ growing reliance on Chinese manufacturers. India blocked Huawei and ZTE, both based in Shenzhen, from selling network equipment to domestic phone carriers this year and in July allowed them to sell network gear in India subject to security checks.

Reliance Communications’ relationship with China Development Bank has grown as it started a pan-India GSM network, said Vikas Aggarwal, an analyst at ICRA Ltd., an affiliate of Moody’s Investors Service in New Delhi.

“It was when they did their entire 2G rollout, their dependence on Chinese vendors increased because Chinese vendors are cost-competitive,” Aggarwal said. The company got better terms for refinancing its debt for third-generation spectrum from China Development Bank than from Indian banks, Aggarwal said.