Indian petrochemicals giant, Reliance Industries Ltd, launched a cash tender offer yesterday (Wednesday) to buy back all of its outstanding bonds maturing in 2005, 2027 and 2026. UBS Warburg is the dealer manager for the tender offer, which seeks to retire $341 million principal of outstanding bonds and will make Reliance the first Indian issuer to complete a public buy-back.
The bonds being bought back are the Reliance 8.125% 2005 bonds, 8.25% 2027 bonds, 7.625% 2027 bonds and 9.375% 2026 bonds, out of which the 2027 and the 2026 bonds are puttable in January 2007 and June 2008 respectively. The launch of such a deal has come as little surprise to most market participants given the group's previous recourse to buy-backs in the secondary market at times of spread widening. At the height of the Asian crisis, for example, the group took full advantage of its huge EBITDA earnings to buy back bonds that had traded out to historically wide levels.
The current tender offer will expire on July 18 and the purchase price for the bonds will be set no later than two full business days prior to the expiration of the offer. The details of the tender offer, which is being launched as a fixed spread to Treasuries, are as follows:
Security Description | Amount Outstanding (US$ millions) | Earliest Redemption Price | Earliest Redemption Date | US Treasury Reference Security | Yields on US Treasuries | Fixed Spread |
8.125% notes due 09/27/05 | 112.55 | $1,000.00 | 09/27/05 | 6.75% notes due 05/15/05 | 3.43% | 2.10% |
8.250% notes due 01/15/27 | 78.09 | $1,000.00 | 01/15/07 | 4.375% notes due 05/15/07 | 4.08% | 2.20% |
7.625% notes due 08/15/27 | 50 | $1,000.00 | 08/15/07 | 4.375% notes due 05/15/07 | 4.08% | 2.20% |
9.375% notes due 6/24/26 | 100 | $1,000.00 | 06/24/08 | 5.63% notes due 05/15/08 | 4.32% | 2.25% |
Assuming US treasury yields do not change and are the same as they were yesterday before Reliance made the announcement, the bonds would have a tender yield of 5.53%, 6.28%, 6.28% and 6.57% respectively. The price would work out to 107.44, 107.58, 105.74 and 113.55 respectively.
Because each of the deals was launched some time ago, observers say that it is difficult to establish who is presently holding the bonds. Although Reliance targeted each of its international issues at US and European investors, observers believe that much of the paper now rests predominantly within the static portfolios of banks in the region, most of which are private banks and branches of European banks in Asia. Moreover, the bonds offer a yield of around 5.5%-7.5%.
The bonds are mostly illiquid as investors have preferred to hold rather trade in the secondary markets. Also the holdings are believed to be in small lots of around $5 million to $10 million. This is true for other Indian issuers such as ICICI and TELCO as well. Traders reported yesterday, that the group is trading on a very wide bid/offer spread for five-year paper in the credit default market, with quotes at 275bp bid/400bp offer.
According to reports in the Indian press, Reliance is believed to have bought back up to $500 million of its roughly $900 million outstanding global bond pool. This is further demonstrated by the 23% reduction in interest expenses for the year ended 31 March, 2002. Reliance's interest expenditure for the period amounted to Rs9.31 billion as compared with Rs12.16 billion in the previous year.
The success of the tender offer will depend on how many bonds Reliance is able to retire. Typically, a 50% acceptance ratio is considered to be a success. Last month, for example, PLDT tendered a total of $180 million in bonds worth $329 million, equating to an average acceptance ratio of around 54%.
However, according to analysts, there are no provisions for a buy-back in the documentation for the 2005 bonds. If this is true, Reliance will have to get a certain percentage of bondholders to approve the buyback.
Reliance's internal cash flows are more than sufficient to buy back the bonds worth $341 million. As of 31 March, 2002, its EBITDA (earnings before interest, tax, depreciation and amortisation) stood at Rs47.25 billion. Total debts, including international borrowings, for Reliance stood at around $2 billion.
Analysts say that while the buyback will not have a significant impact on the group's credit profile, it will demonstrate its confidence in being able to refinance itself. The buyback would also open the market for new bond issues from Reliance.
Reliance has not tapped the international bond markets since the Asian crisis and most recently, a group company completed the largest commercial term loan for an Indian borrower with a $750 million syndicated loan in 2001. The financing marked first corporate balance sheet financing of any size, from a company with just one-year of commercial operations, and without any recourse to guarantees or support.
