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Global appeal, local obstacles

01 Oct 2012

Vedanta Resources has all the hallmarks of an issuer that could tap the global capital markets on a regular basis: an international business structure, plenty of experience with foreign investors, and a key position in one of the world’s fastest growing economies. But the company is being held back, writes Louisa Burwood-Taylor.

Vedanta has global appeal. A natural resources company with interests in minerals, metals, oil and gas, it has been listed in London since 2003. One of its flagship subsidiaries, Sterlite Industries, is listed in Mumbai and New York. As befits its international standing, the company has shown itself to be adept at tapping the bond, loan and equity markets.

But it has not been able to do as much as it would like. Indian borrowing restrictions not only hold back the country’s corporates from considering other offshore markets, but can also increase their costs of funding onshore.

Vedanta’s debt funding is largely used to fund expansion projects and acquisitions. The group has spent about $18bn and $13bn, respectively, for these purposes over the last 10 years. The majority of the firm’s funding needs are in US dollars and are raised offshore.

The company used the bond and loan markets to fund its acquisition of Cairn Energy’s Indian assets, Cairn India, in July 2011. It raised a $2.97bn loan to pay for a 30% stake and issued a $1.65bn dual tranche bond to pay for a 10% stake, the latter comprising a $900m five year tranche and a $750m 10 year bond.

The combined bond is still the largest ever dollar deal by an Indian corporation and it received over $4bn of demand. It even managed to price at the tight end of guidance, proving the strength of international demand for Indian companies.

But despite the success of the deal, restrictions on the use of proceeds if they are transferred or lent onshore have prevented the company from issuing more international dollar debt. Funding officials would like to raise more offshore, but are faced with unappealing regulations — such as a pricing cap on issuances in the bond and loan markets, restrictions on the use of proceeds and a withholding tax on foreign currency coupon payments.

Onshore obstacles too

Indian companies also face a lot of restrictions in borrowing onshore and moves to increase taxes on foreign investors this year have exacerbated these issues. The government has a reputation among some analysts as being heavy-handed with regulations in the funding market, and these regulations affect the prices that companies like Vedanta are forced to pay when they turn to foreign investors, according to Ashish Garg, head of corporate finance, Vedanta Resources.

"There is room for Indian borrowers in the dollar market, for instance, to compress their spreads, but that is purely from a credit point of view," says Garg. "When the regulations are included, the pricing starts to look fairer."

Vedanta is open to issuing in the offshore renminbi market and wants to take advantage of the cheap pricing available but, again, is prohibited by regulations. While an offshore subsidiary could issue the preferred three year CNH bond, if it was to lend the proceeds to an onshore business it could only do so in a five year maturity or more, creating a maturity mismatch, says Garg. "This is a hindrance to us," he says.

When the group returned to the capital markets this year it did so through the equity and loan markets. Cairn India raised $362m through a block trade in Mumbai, while Vedanta has just picked State Bank of India to manage a $300m loan. This will help the company towards the $1bn of loan refinancing it needs to raise before March.

These are its only debt funding plans for the rest of the year, according to Garg. But the group’s various listings also give it flexibility in funding and the option to issue equity on a more ad hoc basis, he says. Vedanta has raised more than $4bn in equity deals in the last 10 years.

The company is also open to convertible bond issuance after issuing its last CB in 2010. And while Garg says he does not expect another CB soon, he thinks the market would be supportive.
01 Oct 2012