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Reliance Sells $800M of Perpetual Debt, Despite having $15B of Cash


Reliance just sold $800 million of perpetual bonds at a yield of 5.875%. The yield is fixed for life – and holders will get money for as long as Reliance exists. Reliance has over 80,000 cr. in cash (See Dec 2012 results), and about 72,000 cr. in current debt. Why would they add more debt – around 4,500 cr. – when they have such a cash hoard? Do they even have the cash they claim to? (In the context of Satyam’s demise, it is important to question even audited statements.)

Their answer, from an ET piece, is that they’re comfortable with cash reserves, need big capex (so the debt helps), and keeps their rating. This may be justifiable, but then perpetual debt? I might have gone to longer term debt, but doing perpetuals is a little strange. (agreed, it’s a tiny amount) But then, if someone was wiling to buy it, then why not sell, I guess.

However I agree with their moving to market debt rather than bank debt (currently 80% of RIL debt is with banks). Because banks are a pain in the interest rate down-cycle, not cutting rates when they should just because they want to squeeze customers as much as possible. And banks can’t even lend below their base rates.

Reliance has enough forex exposure in its sales, so the dollar equation may not matter quite as much. What will matter is if worldwide interest rates go further down, and in this field, Reliance has been a very good assessor. (I.e. if they are selling debt, it’s quite likely interest rates have bottomed)

In the market, this RIL perpetual debt started trading at a 4% loss. Comparable perpetuals from Cheung Kong (Hong Kong) and China’s Agile are trading at discounts as well. Reliance has no incentive to redeem the bond if interest rates are high, and can’t “defer” any payment. While the lower price looks like a bad thing, it’s still pointing to a yield less than 7%, and still one of the lowest in the world.

This is only positive for Reliance as a stock though, since it can make money even with interest rate arbitrage. For now. The stock closed near Rs. 900, and is close to it’s recent 52 week high of 935. 


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