RIL To Loan $25 Bn To Its Oil-To-Chemical Subsidiary To Expedite Deal With Saudi Aramco

In 2019, Reliance had agreed to sell a  20% stake in the O2C unit to Saudi Aramco for an enterprise value of $75 billion, but the deal didn't fructify over differences valuation between both parties after the COVID-19 pandemic hit oil demand.

Mukesh Ambani | File Image

Mukesh Ambani-led Reliance Industries (RIL), which raised $27 billion from global investors and flushed with cash and cash equivalents of $30 billion, has agreed to loan $25 billion to an independent unit, which will house the newly carved out oil-to-chemicals (O2C) business.

In 2019, Reliance had agreed to sell a  20% stake in the O2C unit to Saudi Aramco for an enterprise value of $75 billion, but the deal didn't fructify over differences valuation between both parties after the COVID-19 pandemic hit oil demand.

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With the improvement in fuel demand, Reliance restructuring is seen as an attempt to complete the long-pending deal. Reliance had outstanding debt of $35.2 billion against cash and cash equivalent of $30.2 billion as of December 31, 2020.

"Balance capital commitment receivables (on account of Rights issue) are in excess of quarter end Net Debt levels," Mukesh Ambani led firm said last month.  

The nature of risk and returns involved in the O2C Business are distinct from those of the other RIL businesses, and the O2C Business attracts a distinct set of investors and strategic partners, said the scheme of arrangement between RIL and O2C.

"RIL has been exploring various opportunities to bring in strategic/other investors in the O2C Business. Investors have expressed interest to make an investment in the O2C Business. Being a listed company, RIL cannot issue shares with differential rights in terms of SEBI Regulations. Therefore, the O2C Undertaking has to be transferred into a wholly-owned subsidiary of RIL, in which the Investor(s) will invest," said the scheme explaining the rationale behind the transfer of O2C as a separate subsidiary.

Reliance proposes to fund the assets of the new O2C unit by interest-bearing loan, which will be an – efficient mechanism to upstream cash, including any potential capital receipts in O2C, said RIL in a presentation filed with the exchanges.

The O2C will have a well-capitalized balance sheet supported by high-quality assets and will pay floating rate interest linked to 1-year SBI MCLR rate. It will enjoy long-dated loans with the flexibility to structure repayments and sustainable cash flows to self-fund growth projects, the presentation added.

Last year during the pandemic, RIL raised over $27 billion from global investors in its retail and technology business to make the company net debt-free.

The O2C business comprising refining, petrochemicals, and fuel retail contributed over 60% to its revenue during the last fiscal. However, the share of O2C in the company's topline and the bottom line is seen falling as the firm is pivoting towards consumer-facing technology and retail businesses.

The company expects to get the necessary approvals to hive off its oil-to-chemicals (O2C) business into a separate unit by the second quarter of the next fiscal year. It has already received consents from the markets regulator and stock exchanges, and the company will seek a nod from shareholders and creditors in the first quarter of the year starting April, said the presentation.

Sweta Patodia, Analyst, Corporate Finance Group, Moody's Investors Service, said, "RIL's separation of its O2C business to a subsidiary will facilitate a potential stake sale to Aramco, possibly enabling a further reduction in RIL's net debt. Until the stake sale is completed, there will be no subordination risk for RIL's lenders, as the company will continue to have full access to the O2C business' cash flows, given its full ownership of and no external debt at the new subsidiary."