IFR-Reliance perps NC5 plunge on the break

Last Updated: Wed, Jan 30, 2013 11:10 hrs

SINGAPORE, Jan 30 (IFR) - Indian conglomerate [Reliance Industries] (Baa2/BBB) last night printed the first US dollar senior perpetual bond out of India and at a yield of 5.875% also achieved the lowest coupon for a rated US dollar perp in Asia to date.

The perps are, however, under water in the secondary reflecting that investors have not taken too kindly to the perceived risk in the structure.

The USD800m transaction was priced at par but was traded as low as 96.375 this morning, according to a banker away from the trade. While part of the sell-off could be attributed to a weaker market, Reliance far underperformed other investment-grade bonds.

Fund managers had already expressed concerns about the weak structure of the bond and said they were staying away from it. Though according to leads 47% of the bonds ended up with institutional investors, 53% of it went to private banking accounts.

"Private banking accounts will get burned with this," said one fund manager, who did not buy the deal.

The concern for institutional investors is that Reliance may not call the bonds in 5.5 years, when the bonds become callable. Indeed, the bond coupon resets in the fifth-year to the reoffer spread plus current Treasury levels, but features no step-up. This means the company has little incentive to call if rates are not lower.

If rates drop, the bonds would make for good holdings given their relatively high coupon, but then on the fifth year investors would be stripped of the benefits of owning the bonds. The structure offered "little upside and a lot of downside," according to another portfolio manager. The feeling seems to have been reflected in the market as the bonds sold off heavily on the break.

One person close to the deal justified the secondary performance saying the bonds did not move so much on an option-adjusted spread basis. He argued that when Mexican state-owned oil giant Pemex (Baa1/BBB/BBB) priced its own senior perps in 2010 at 6.625%, the OAS on the bonds widened more in the first days of trading.

Pemex's bonds now trade at 106.00 in price terms, though. For Reliance, the deal allowed flexible terms against a 30-year or any short-dated paper. To be sure, the company has paid extra for the trigger.

Reliance could have obtained a much tighter pricing if it chose to print a 30-year bond instead. Reliance 2040 bonds were quoted with a yield of around 5.2% on January 28 when the latest Reg S/144a perp NC 5 year deal was launched, suggesting it could have saved some 60bp on a straight bonds versus a perp.

The orderbook of Reliance was close to USD3bn from 170 accounts. Asian investors bought 53%, 27% went to Europe and 20% to US investors. Reliance started marketing its perp non-call 5 issue on Monday with initial guidance at a wider 6% area. The Reg S/144a bond was led by Bank of America Merrill Lynch, Citigroup, HSBC, Barclays, Deutsche Bank, JP Morgan and The Royal Bank of Scotland.

In 1997, the company had already printed a 100-year bond, which is yet to be matched by another Indian company. The issue will be under New York law and listing will be in the Singapore stock exchange.

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