Reliance turns to ECA-backed financing

The Indian oil-to-retail conglomerate aims to diversify funding and extend tenors, shifting Reliance towards cheaper ECA-backed financing.
Mukesh Ambani, chairman of Reliance, which is negotiating deals with six export credit agencies around the world
Mukesh Ambani, chairman of Reliance, which is negotiating deals with six export credit agencies around the world

Billionaire Mukesh Ambani’s Reliance Industries is an active borrower in the bond and syndicated loan markets, but it is increasingly taking advantage of export credit agency (ECA)-backed financing as a way to diversify its funding sources.

Vineyesh Sawhney, senior vice president of finance at Reliance, told FinanceAsia that the company is dealing with an additional six ECAs in Asia, North America and a number of countries in Europe, having already closed deals with six other agencies during the past two years. “We think these facilities will close in first half of 2014. By then, we will probably be the company with the most number of active ECA relationships.”

An ECA is a financial institution or agency that provides trade financing to domestic companies for their international activities, including products such as guarantees, loans and insurance to promote exports in the domestic country. The primary objective of ECAs is to remove the risk and uncertainty of payments to exporters when exporting outside of their country.

During the past two years, Reliance, which is responsible for about 14% of India’s exports, has raised a total of $13 billion, comprising $5 billion in ECA-backed financing, an equal amount in syndicated loans and $3 billion through debt capital markets, both in G3 and local currencies.

“What we have done, unlike anything in the past, is that now we access three different sources of financing without over-dependence on any one of them,” said Sawhney. “This has been a very conscious diversification strategy for us.”

Considered India’s biggest private-sector enterprise, Reliance has strong balance-sheet liquidity and low leverage. The company is rated BBB+ by Standard & Poor’s and Baa2 by Moody’s, which is two notches and one notch respectively above the Indian sovereign. This puts the corporate in a good position to seek financing at low costs.

As Reliance discovered this year, the cost of funding available from ECAs is far more competitive than other financing options, especially through its deals with agencies in the US, Korea, France and the UK, all of which extended ECA-backed funding to Reliance during 2013 after rating it above India’s sovereign ceiling — the first time any company has won such favourable treatment.

As a result, the Indian company was able to lock in capital commitments for tenors as long as 14 years and at extremely low costs — on average 3.5% for a fixed-rate ECA from the US government versus 5% to 5.5% for a 10-year dollar-denominated bond, said Sawhney.

“ECA-backed financing enables us to lengthen the tenor of our debt portfolio and borrow significant sums at a very competitive rate of financing,” said Sawhney. “They are linked to our sourcing of equipment and services from their respective countries.

“The ECAs have provided us with a better-than-sovereign rating for the transactions, flexibility to draw over three years and repayment over 10 years thereafter,” he added. “However a bond issuance would be priced on specific market conditions prevalent at the time of such issuance and would need to be drawn down within a short period of time.”

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