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Corporate Jan 18, 2012

Anil bhai, what will that ‘cheap China loan’ really cost you?

By Venky Vembu

2011 has not been a great year for Anil Ambani.

The companies in his telecom-to-energy conglomerate are sitting on a mountain of debt, a chunk of which is denominated in foreign currencies and is coming up for redemption; three of his executives at Reliance ADAG were implicated in India's biggest corruption scandal, and he himself had to suffer the ignominy of an informal chat with the CBI; stocks of his companies have been battered down; attempts to sell parts of his business to raise funds to retire debt have not yet fructified; fresh borrowing costs have shot up, and have been compounded by the sharp fall in the rupee in recent months; and, in recent days, he has even been the victim of an anonymous defamation campaign.

About the only good thing to happen to the group was a lessening of tensions with brother Mukesh Ambani, but the vultures were circling overhead anyway.

And just when the perfect storm of bad karma was threatening his empire, Anil has been thrown a lifeline.

Anil Ambani

2011 has not been a great year for Anil Ambani. Punit Paranjpe/Reuters

It comes in the form of a $1.2 billion loan to Reliance Communications (RCom) from three Chinese state-owned banks - the China Development Bank (CDB), the Export Import Bank of China, and the Industrial and Commercial Bank of China (ICBC).

This is, in fact, the second time RCom has borrowed from Chinese banks; last March, Anil borrowed $1.9 billion from the CDB, much of whose proceeds were used to purchase telecom equipment from China's Huawei Technologies.

According to HSBC, the latest loans will help Reliance Communications cap its interest expenses at 5 percent, compared to the dollar funding cost of 6.8 percent.

Analysts point out that this is a really, really big deal - not just for Reliance, but also for other Indian corporates, since they too face redemptions on their foreign currency convertible bonds (FCCB), and would have been slammed if Reliance hadn't been able to secure the finance.

Raj Kothari, a convertible trader based in London, told Bloomberg that "If Reliance Communications had defaulted, the whole Indian convertible market would have collapsed".

Juergen Maier, a fund manager at Raiffeisen Capital Management, noted that "without the Chinese, they (Reliance) would have been in big trouble.. The Chinese are the last lenders left..."

What's in it for the Chinese?

Since there's no such thing as a free lunch - or an ultra-cheap loan - what are the Chinese banks' motives in taking a large bet on Anil's empire?

For one thing, the primary vehicles for China's loans to overseas corporations - principally the ExIm Bank and CDB, from which Ambani secured his low-cost loan - are state-owned "policy banks" with the express mandate to "advance China's national interest."

China has been using these banks as the advance vehicle to leverage its financial muscle to expand its exports to developing economies at a time when its primary export markets - in the US and Europe - are shrinking. China is also looking to graduate from low-cost made-in-China "junk" to higher-end exports, such as telecom infrastructure and equipment needed in energy projects.

For instance, the loan that Anil secured last year was used to part-finance a $10 billion deal to purchase power generation equipment from the state-owned Shanghai Electric; it was then billed as the "largest single business transaction" between India and China.

Given the significance of that deal, Shanghai Electric offered the equipment at a 30-40 percent discount (relative to what, say, a General Electric, would have offered). The preferential-interest rate loan lowered that discount even further, to about 60 percent.

To that extent, these cheap loans may appear to be a win-win proposition for both sides.

But there's a catch

But in the stampede to secure 'cheap' Chinese loans, Anil Ambani - and other companies who are contemplating similar deals - could also end up paying a price, going by the experience of other entities in other countries that similarly entered into 'concessional' loan agreements with Chinese lenders.

CDB, observes Erica Downs at the John L. Thornton China Center at Brookings, "is a link between the strategic ambitions of the Chinese government and the commercial interests of Chinese firms because the financing it provides to support cross-border deals connects state policy to commercial activity."

And although China frequently claims that its "concessional loans" come without strings attached, they in fact come with specific conditionalities that often work to advance Chinese strategic and commercial interests at the cost of the borrowers'.

Since the mid-2000s, for instance, CDB has participated in some of China's most high-profile cross-border deals. Yet, it's not always been a reliable 'lender'.

Continues on the next page

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by Venky Vembu

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