By Anurag Joshi and Mehul Srivastava
(Updates with analysts? comment in ninth paragraph.)
Jan. 18 (Bloomberg) -- Indian billionaire Anil Ambani is tapping Chinese lenders for a second time in less than a year after a decline in the value of his flagship company left him with almost $1 billion of convertible bonds to repay by March.
Ambani?s Reliance Communications Ltd. yesterday said it will borrow $1.18 billion from lenders including China Development Bank Corp., Export-Import Bank of China and Industrial & Commercial Bank of China. The proceeds will help India?s second-largest mobile-phone operator redeem convertible debt maturing on March 1. The shares are trading 87 percent below the price at which the notes can be switched to equity.
The Chinese loans will help Reliance Communications cap its interest expense for the borrowing at 5 percent even after dollar funding costs for Indian companies rose 171 basis points in 2011 to 6.83 percent, according to HSBC Holdings Plc. The credit helps China expand its role in the world?s second-fastest growing major economy that?s also competing with the north Asian nation for resources, said Erica Downs, a fellow at The Brookings Institution.
?Without the Chinese, they would have been in big trouble,? said Juergen Maier, a Vienna-based fund manager at Raiffeisen Capital Management that oversees about $1.1 billion of emerging-market assets. ?The Chinese are the last lenders left that will lend them large amounts of money at reasonable interest rates.?
Reliance Communications shares gained 1.9 percent to 90.5 rupees in Mumbai at 10:30 a.m., compared with a conversion price of 661 rupees for the debt. The shares declined 52 percent in dollar terms last year making it the worst-performing stock in the 28-member MSCI AC Asia Pacific, excluding-Japan, Telecommunication Services Index.
?Buying Interest?
The yield on the Mumbai-based company?s notes issued in 2007 dropped 19 percentage points to 11.78 percent yesterday, the lowest level since June 9, according to prices provided by Barclays Plc. Indian companies have a record $5.3 billion of convertible notes maturing this year, according to data compiled by Bloomberg.
?If Reliance Communications had defaulted, the whole Indian convertible market would have collapsed,? Raj Kothari, a convertible trader at Sun Global Investments Ltd. in London, said in a telephone interview. ?Sentiment has improved in Indian convertibles and we are seeing buying interest from investors.?
The loan to Reliance Communications will have an ?extended? seven-year maturity with an interest cost of 5 percent, according to yesterday?s statement.
?Balance Sheet Stretched?
The transaction ?can at best be seen as an indicator of Reliance Communications ability to raise debt in the market, or a stamp of confidence in Reliance Communications by the Chinese banks,? Rohit Chordia and Shyam M, analysts at Kotak Institutional Equities, wrote in a note to clients today. The company?s ?balance sheet remains stretched.?
The company plans to sell assets to repay debt. Reliance Communications plans to raise as much as $1.5 billion through a Singapore listing of its FLAG Telecom submarine cable assets, said a person with knowledge of the matter, declining to be identified because the process is private.
The company, which had its credit rating cut one notch to the third-highest level by ICRA Ltd., the local unit of Moody?s Investors Service in June, has $4.8 billion of debt due by 2021, Bloomberg data show.
Reliance Communications? earnings before tax would have slumped 50 percent in the year ending March had the mobile- phone operator refinanced its debt at the 12 percent rate that AAA-rated corporates have to pay on rupee-denominated loans, Edelweiss Securities Ltd. wrote in a note to clients on Nov. 22
Chinese Equipment
Ambani sought help from Chinese lenders last year as well. Reliance Communications on March 9 said it will borrow 87 billion rupees ($1.7 billion) from a group led by China Development Bank to refinance the purchase of third-generation airwaves and buy equipment.
Ambani?s Reliance Power Ltd. on Sept. 30 got approval from India?s central bank to borrow $1.1 billion from Chinese lenders to build a 3,960-megawatt power project. Ambani?s companies have agreed to borrow as much as $15 billion from lenders in the north Asian nation.
Reliance Communications used most of the loans to repay costly debt, according to a Dec. 15, 2010, statement. The rest is being used to buy Chinese-made equipment, including $600 million for telecommunications gear from Huwaei Technologies Co. and ZTE Corp., the company said.
Chinese Goals
Ambani signed an agreement in October 2010 to borrow as much as $12 billion from Chinese banks to buy power equipment from Shanghai Electric Group for Reliance Power even as India?s power ministry endorsed a plan last month to triple import duty to help local manufacturers compete with Chinese rivals.
?Chinese banks try and balance two goals to expand their loan portfolio and if that can happen while supporting Chinese diplomacy, then it?s even better,? Downs, a fellow at the John L. Thornton China Center at the Washington, D.C.-based Brookings Institution, said on Jan. 11. ?CDB, as a state bank, think of themselves as a sort of development finance corporation, and borrowers see them as a lender of last resort.?
--Editors: Arijit Ghosh, Sam Nagarajan
To contact the reporters on this story: Anurag Joshi in Mumbai at ajoshi53@bloomberg.net; Mehul Srivastava in New Delhi at msrivastava6@bloomberg.net
To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net
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