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RIL’s US Outfit Raises $1 BN to Fund Shale Gas Business

  • Proceeds to be used by Reliance Holding USA, to fund ongoing capital expenditure, to make business investmentsReliance Industries Ltd (RIL), India’s most valuable company by market capital, said on Friday that its US-based subsidiary had raised $1 billion (around Rs. 5,000 crore) through a sale of 10-year bonds to finance capital expenditure on its US business operations.
  • The proceeds will be used by Reliance Holding USA Inc. to “fund its ongoing capital expenditure, to make business investments, to refinance its existing debt and for general corporate purposes”, RIL said in a statement to the stock exchanges.
  • The debt is “fully and unconditionally guaranteed by RIL”, it added.
  • Reliance Holding USA is the vehicle through which the oil-to-yarn and retail conglomerate holds interests in three shale gas acreages in the US. Between April and August 2010, RIL acquired the interests for an aggregate investment of around $3.44 billion.
  • The bonds, which carry a fixed interest of 5.4% per annum and are priced 345 basis points over the 10-year US Treasury note, is the first to be issued by an Indian corporate entity in 2012. One basis point is one-hundredth of a percentage point.“The transaction was well executed despite the short time-window and a volatile global environment,” V. Srikanth, RIL’s joint chief financial officer, said in the statement.
  • Bank of America-Merrill Lynch, Barclays Capital Plc, Citigroup Global Markets Inc., the Hongkong and Shanghai Banking Corp. Ltd and UBS AG acted as joint book-runners and lead managers to the transaction.
  • According to an investment banker involved in the transaction, one noteworthy aspect of this bond sale was that it was priced at “no new issue concession”.
  • Explaining what this meant, Rajiv Nayar, managing director and head of capital markets origination at Citigroup Global Markets, India, said that due to recent volatility, and increased risk aversion in the second half of 2011, new bond sales have been priced at a premium of 15-30 basis points over the trading levels of existing bonds of issuers.
  • “The Reliance bond was remarkable in that it was priced without any premium, which is attributable to strong Reliance credit, tremendous market momentum, impeccable timing and highest quality order book,” Nayar said.
  • RIL had raised $1.5 billion through a bond sale in October 2010. It was raised in two tranches—$1 billion of 10-year money at 4.5% and $500 million of 30-year money at 6.25%.
  • “Reliance Holding USA is a separate entity based in the US and after putting in equity into the firm, RIL may be raising this money to fund the rest of the shale gas business expansion through debt,” Niraj Mansingka, oil and gas sector analyst at Edelweiss Securities Ltd, a Mumbai-based brokerage, said. “At a fixed yield of 5.4% that Reliance will have to pay, it may not be a bad deal.”
  • Despite the challenging business environment, Nayar said it wasn’t too much of a challenge to secure the debt for RIL.
  • “Equity and credit markets are off to a stronger start in 2012,” he said. “With risk aversion abating, global investors are increasingly looking to buy into high quality issuers like RIL.”
  • On Thursday, Standard and Poor’s Rating Services (S&P) assigned a ‘BBB’ long-term issue rating to RIL’s bonds, citing the firm’s large-scale, integrated and efficient oil refining and petrochemical operations, and business diversity. “In addition, the company has stable cash flows and low leverage with strong liquidity,” an S&P statement said.
  • As on 31 December, RIL had cash and cash equivalents to the tune of Rs. 74,503 crore on its books.

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