Photo of Kamal Shanbag, Reliance Industries Limited and Prashant Pillai, J.P. Morgan.

This organisation is the first Indian company to issue a US Export-Import Bank guaranteed note. Timing was key here and the low interest rate environment in the US, coupled with a strong demand for high quality assets in the capital markets, provided Reliance with a window of opportunity.

The challenge

Reliance has embarked on a large-scale expansion project at an estimated cost of over US$11bn. The company was keen to capitalise on the Export-Import Bank of the United States’ (US EXIM Bank) long-term financing programme to partially fund the cost of setting up the projects at Jamnagar. Reliance mandated J.P. Morgan for its established working relationship with the US EXIM Bank to assist the company to arrange the financing.

The solution

The initial structure of the deal comprised a US$1bn direct loan from the US EXIM Bank and a US$1bn floating-rate loan from J.P. Morgan guaranteed by US EXIM Bank with an option to refinance the floating rate loan guaranteed by US EXIM Bank through capital markets issuances. With the low interest rate environment in the US, and strong demand for high quality assets in the capital markets, Reliance was keen to leverage the opportunity to fix the interest rate over the remaining lifespan of the facility of over ten years, thereby managing volatility of financing costs in a rising interest rate environment.

In consultation with J.P. Morgan, two options were identified to meet the above objectives:

• An interest rate hedge: This would meet Reliance’s objective to fix the interest rate but it would have to use its existing bank derivative lines and its own credit profile for pricing.
• Exercise the option of issuing US EXIM Bank guaranteed fixed rate notes to institutional investors in the US: This would enable Reliance to take advantage of the low interest rate environment in the US, lock in the low interest rate for the remaining lifespan of the facility and leverage the US Government credit profile for pricing the securities.

Reliance chose the unique option of issuing US EXIM Bank guaranteed fixed rate notes to refinance the US EXIM Bank guaranteed floating rate loan. The first placement was completed in August 2015 for US$225m @ 2.512% p.a. In March 2016, Reliance issued a second placement of US$190.7m @ 2.060% p.a. And more recently on October 25th, Reliance issued a third placement of US$184.284m @ 1.870% p.a. These notes, guaranteed by the US EXIM Bank, have a tenor of ten years with interest payable semi-annually. The principal amount of the notes is payable in consecutive semi-annual instalments commencing July 2016 up to the final maturity in January 2026.

Both the issuances were fully subscribed and achieved the target pricing objective, enabling Reliance to refinance the US EXIM guaranteed floating rate loan via capital market issuance, thus providing it with an embedded hedge against potential upward interest rate movements over the remaining lifespan of the facility of over ten years.

Best practice and innovation

Timing is key when it comes to bond issuances.

The low interest rate environment in the US, coupled with a strong demand for high quality assets in the capital markets, provided Reliance with a window of opportunity. The company was quick to capitalise on it with the three capital market offerings which were fully subscribed, reflecting the timeliness of the placement and pricing.

Reliance is honoured to be a recipient of the Adam Smith Award Asia for Best Financing Solution for being the first company in India to use the US Export-Import Bank capital markets programme. Winning this award also further validates the strategy of a dedicated treasury management team of thinking big, going global, developing key core relationships, spotting and acting on opportunities at lightning speed, and introducing first-to-the-world financial innovations into the market. Being innovative is in the DNA of the treasury team at Reliance. It is at the very core of our strategy along with fiscal prudence and strong cash flows.

Vineyesh Sawhney, Head – Financial Resources, Reliance Industries

Against the backdrop of falling prices within the global energy markets and rising interest rates, Reliance was able to generate substantial cost-savings.

As Vineyesh Sawhney, Head – Financial Resources explains, “Reliance is the only private sector energy company globally as well as the only Indian company to issue US EXIM Bank guaranteed notes to-date. The opportunistic offerings have enabled Reliance to fix at low interest rates thereby eliminating the volatility in interest cost outflows over the life of the facility.”

Key benefits

• Substantial cost savings due to fixing the facility at low interest rate in a rising interest rate environment.
• Innovative structure.
• Timeliness of placement and pricing.