Vedanta turns to LIC to raise Rs 5k cr bonds as offshore debt gets costlier

At a time when higher US interest rates have made it more expensive for Indian firms to tap foreign bond markets, mining major Vedanta Limited is likely to have struck a direct transaction with the Life Insurance Corporation of India to raise Rs 4,809 crore via 10-year bonds, multiple sources confirmed to Business Standard.

“The transaction is an LIC transaction, it is structured with LIC. They [Vedanta] are double AA [rated]. It’s a 10-year paper. It’s a direct trade with non-coupon bidding, it is open bidding,” a senior treasury official said on condition of anonymity.

“The pricing is about 10-year G-sec plus 100 basis points–likely [to be] around 8.50 per cent,” the source said. The 10-year benchmark government bond settled at 7.41 per cent on Monday.

Multiple sources said that while details of such structured transactions are not made public, the size of the deal pointed towards the involvement of the LIC.

The mining giant is also looking at raising Rs 1,800-2,000 crore through the sale of 18-month papers, although sources did not mention the investors involved in that fund-raise.

Emails sent by Business Standard to Vedanta and LIC did not receive replies till the time of going to press.

According to sources, while the 10-year bond deal has been done, talks were still on for the 18-month bonds.

Vedanta is planning to use the proceeds to prepay or repay existing debt and for capital spending. The firm last raised funds via local currency bonds in December 2021.

Earlier this calendar year, agencies such as Crisil and India Ratings upgraded Vedanta to AA.

Last week, the dollar-denominated debt of Vedanta Resources maturing in 2024 suffered its biggest drop as the rupee weakened to record lows. The domestic currency settled at an all-time low of 78.39 to the dollar on June 22. So far this calendar year, the rupee has shed about 5 per cent to the greenback.

The rupee’s weakness amid higher US interest rates, elevated crude oil prices and record overseas outflows from Indian stocks, has made it costlier for firms to service their foreign debt.

In February, 2021, Vedanta had raised $1.2 billion through offshore bonds.

India Ratings and Research Director Soumyajit Niyogi said the tailwainds that had gave Indian borrowers easy access to offshore markets and helped them tap cheaper funds the past two years, have now turned into headwinds.

“The rates in advanced economies have gone up significantly, especially at the shorter end of the curve, which is largely linked to floating rate borrowing from offshore markets. The weak rupee has further worsened the arithmetic,” said Niyogi,.

Data compiled by Business Standard research bureau showed that from $6.7 billion raised in March 2022, Indian firms’ offshore borrowing has dropped to a mere $50 million as of June 2022.

Incidentally, it was in March 2022 that the US Federal Reserve embarked on its current monetary tightening cycle, raising interest rates by 25 basis points. Since then, the Fed has hiked rates by an additional 125 basis points.

The cost of borrowing for Indian corporates has also risen the past few months as the Reserve Bank of India has tightened interest rates amid high inflation. The RBI has hiked the repo rate by a total of 90 basis points since May. With interest rates on funds raised from the financial markets inching up, borrowers are increasingly tapping bank loans. According to RBI data, bank credit growth was 13.1 per cent in early June–the highest in three years.

The yield on the 10-year benchmark government security has climbed 96 basis points so far in 2022, with a 57 bps rise coming in the April-June period. Government bonds yields are the pricing benchmarks for corporate bonds.

According to Bloomberg data, yields on AAA-rated 10-year corporate bonds have risen from 7 per cent at close on March 31 to 7.77 per cent as on June 24. Over the same period, yields on AA-rated 10-year corporate bonds have climbed from 7.79 per cent to 8.48 per cent.