Reliance mandates India's largest corporate bond

The petrochemicals giant looks set to capitalize on ICICI Bank''s recent success in the international bond markets.

Reliance Industries, India's largest private sector company is believed to have mandated Credit Suisse First Boston for a bond issue that will raise up to $750 million. Sector specialists believe the deal is likely to come to market within the next 10 days and will have a five-year maturity and a tax friendly structure based out of Mauritius. Standard Chartered is also said to have a junior syndicate role.

For CSFB the mandate marks a huge coup given that it only resumed business on the subcontinent a month ago after a two-and-a-half year hiatus resulting from the Ketan Parekh scandal. The US house was the most high profile of those accused of "bear hammering" the Indian stock market in March 2001. The incident led to a SEBI investigation and indefinite suspension of CSFB's broking operations, which have remained lodged in appeal ever since.

As such it is hard to think of a more impressive borrower with which to re-assert its Indian investment banking franchise than Reliance, the country's most respected and market savvy credit by some margin. Indeed, although Reliance has a very full yield curve, it is all highly illiquid because the company has spent the past six years using periods of spread volatility to buy back debt at cheap levels.

Reliance has six dollar bonds outstanding: an 8.125% September 2005 bond with about $116 million left in the market; an 8.25% January 2027 put 2007 bond with $190 million left; a 9.375% June 2026 put 2008 bond with $76 million; a 10.375% June 2016 bond with $100 million; a 10.5% August 2046 bond with $100 million; and a 10.25% 2097 bond also with $100 million outstanding.

The most relevant pricing comparable will be its 2008 put bond, which is currently trading in a range of about 175bp to 180bp over Treasuries. At this level, it is bid about 20bp wide of ICICI Bank, which priced a $300 million five-year bond two weeks ago at 146bp over Treasuries.

Since launch, ICICI Bank's deal has tightened in as far as 140bp over Treasuries, before widening out to 155bp over. It has, however, slightly outperformed the rest of the Asian market, which has also traded wider over past week on thin volume.

ICICI Bank has a two notch higher rating than Reliance from Moody's and crucially this puts it into investment grade territory. The bank is currently rated Baa3/BB compared to a Ba2/BB level for Reliance. However, Reliance should benefit from Moody's move in mid October to put India's Ba1 sovereign rating on watch for upgrade.

Given Reliance's lower rating and larger issue size, it will almost certainly price at a premium to ICICI Bank. But at the same time, positive sentiment towards India and the sheer weight of the company's brand name should ensure that any premium is slim.

For fixed income investors, Reliance also offers an improving credit story. One of the company's strategic aims has been to re-finance higher cost debt and cut its interest expense. First quarter results for the three-month period ending June 2003 show that the company's interest coverage ratio strengthened to 6.6 times from 5 times, while interest cost fell 14.3% year-on-year.

At the end of the Financial Year Ended March 2003, the company had $4.4 billion equivalent gross debt position, equating to a debt to equity ratio of 65% and debt to capitalization ratio of 39.4%

At the end of the Financial Year Ended March 2003, the company had a $4.4 billion equivalent gross debt position, equating to a gross debt to equity ratio of 65% and gross debt to capitalization ratio of 39.4%.

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