Billionaire Ambani Debt Risk Rises Most in Asia on Gas Slump: India Credit

Mukesh D. Ambani, chairman of Reliance Industries Ltd. Photographer: Pankaj Nangia/Bloomberg

The cost of protecting the debt of Reliance Industries Ltd. (RIL) has risen the most among Asia’s oil companies this quarter as the explorer’s natural-gas output drops and profit growth slows.

Credit default swaps on the Mumbai-based company, controlled by billionaire Mukesh Ambani, have increased 15 basis points to 165, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Contracts on Petroleo Brasiliero SA have slid 11 basis points, or 0.11 percentage point, to 132 after the Rio de Janeiro-based company announced oil discoveries last month.

Spiraling global commodity prices have stoked inflation in the world’s second fastest-growing major economy, underscoring the need to secure energy supplies for the nation’s 1.2 billion people. Bonds of India’s oil and gas explorers are slumping this year, causing the difference in yields over government debt to double in the past six months for Reliance and state-run rival Oil & Natural Gas Corp.

“Reliance gas production has been falling and there is still no certainty when it will increase again,” said Manoj Kulkarni, head of credit research at brokerage SJS Markets Ltd. in Hong Kong. “Lower output has curbed earnings and Reliance hasn’t been able to gain from the commodity price rise.”
Bond Yields

Natural-gas output from India’s biggest deposit, the Reliance-controlled KG-D6 field, has dropped 17 percent from a peak of about 60 million cubic meters a day set in June year. Net income at the company rose 14 percent from a year earlier in the three months ended March, the least in six quarters, following the drop in production.

The yield on Reliance’s 8.75 percent rupee bond due May 2020 was 9.37 percent today, according to data compiled by Bloomberg. The rate has climbed 25 basis points since the company filed its latest income statement on April 21. The yield on the 4.5 percent dollar note due October 2020 has increased five basis points this month to 5.16 percent.

“Profits have taken a hit as production has dropped,” Raj Kothari, a London-based fixed-income trader at Sun Global Investments Ltd., said in an interview yesterday. “Gas output will be the trigger for growth at Reliance. Everyone is waiting very keenly for clarity on that.”

Yields at about 6 percent would be an opportunity for investors to buy the debt, he said.
‘Production Issues’

Bonds of ONGC Videsh, a unit of ONGC, are headed for a fourth weekly drop. Natural-gas output at the New Delhi-based company was little changed at 23.1 billion cubic meters in the 12 months ended March from the year-earlier period, according to petroleum ministry data. The yield on the 8.54 percent note due January 2020 fell three basis points today to 9.33 percent, Bloomberg data show.

The difference in yields between Reliance’s nine-year note and similar-maturity government bonds has widened 48 basis points since the end of November to 104, according to data compiled by Bloomberg. A similar measure for ONGC Videsh has doubled to 100 basis points.

“With ONGC, it hasn’t been able to increase output, while Reliance has a lot of production issues,” Jagdish Meghnani, a Mumbai-based oil-and-gas analyst at Alchemy Share & Stock Brokers, said in an interview yesterday. “A year ago, we were looking at comfortable growth in supply, which included Reliance’s output. But now the scenario has changed.”

Manoj Warrier, a Mumbai-based spokesman for Reliance, declined to comment. A.K. Hazarika, chairman and managing director of ONGC, didn’t return two calls made to his mobile phone.
Diversified Earnings

The rise in the credit-default swaps of Reliance follows an almost 8 percent increase in its outstanding debt to 674 billion rupees ($15 billion) as of March from a year earlier. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The drop in natural-gas output isn’t a problem for the company because of its diversified revenue stream, according to Sun Global. Reliance, which gets about 38 percent of its profits from refining, also produces chemicals, clothes and owns a broadband company. The company announced in April last year that it would take a stake in Deccan Cargo & Express Logistics Pvt., a Bangalore-based cargo airline.

“Repaying this debt shouldn’t be a problem for Reliance since their cash flows from the refineries are very strong,” Sun Global’s Kothari said. “When investors think of buying Indian corporate debt, they think of Reliance.”
Crude Prices

Importing energy supplies has become more expensive for India following the rupee’s depreciation this year. The currency, which has lost 0.5 percent in 2011, traded at 44.93 per dollar yesterday, according to data compiled by Bloomberg.

Inflation in the nation, which relies on imports for 75 percent of its energy needs, has accelerated as crude oil traded in New York has risen 9 percent this year. Wholesale prices in the South Asian economy climbed 8.98 percent in March after increasing 8.31 percent the previous month.

The yield on India’s 7.8 percent bond due April 2021 was 8.34 percent today, according to the central bank’s trading system. The rate, which rose 14 basis points in April, has climbed 21 basis points this month. The yield is 514 basis points more than similar-maturity U.S. Treasuries, up from a nine-month low of 436 reached on April 8. India’s bonds have returned 0.6 percent this year, the least among 10 local- currency debt markets outside Japan, according to indexes compiled by HSBC Holdings Plc.

“Reliance has been spreading itself thin by getting into a lot of areas that aren’t its specialization,” said Vienna-based Juergen Maier, who helps manage about $1.3 billion of emerging- market shares at Raiffeisen Capital Management in Vienna. “I’d much rather have seen them investing more money into their gas field to raise production.”