According to sources, LIC was the sole party solicited by Essar Power, which lured the insurer by offering an attractive coupon rate of 12.5% on the bonds — a near 200-basis-point premium to the coupon rate offered on similar rated paper in the market.
Essar Power was assigned a credit rating of A+ by ratings agency Credit Analysis and Research (Care) in October 2012 in respect of the company's proposed R5,000-crore bond issue. Similar rated paper in the current market is priced at 10-10.5%.
India's largest life insurance company is expected to invest around R2.25 lakh crore in the current fiscal. Of this, R40,000 crore has been earmarked for equity investments, while the rest will go into debt instruments.
Essar Power, a wholly owned unit of UK-listed Essar Energy, says the main purpose of the offering was to extend the maturity of their debt, rather than lower interest costs. While the interest payments are higher than the average coupon on similar bond offerings in the market, they are in line with the interest costs the company is paying on its existing debt. The average interest cost of the company's rupee debt is between 12.5% and 13%, confirmed company sources.
With banks tightening the flow of funds into the power sector, Essar Power has been eyeing bond offerings as an alternate source of funds. Essar Power has total debt of nearly $3 billion (R19,000 crore at current exchange rate). The company's debt service requirement stands at around R1,500-2,000 crore annually.
Essar Power has detailed plans to raise R5,000 crore through bond issues and is half way through the plan, having raised R750 crore in July and R629 crore in May. The previous bond offerings had attracted financial investors other than LIC as well. This latest tranche issued to LIC will be repaid from 2017 to 2024, and will be listed on the Bombay Stock Exchange.
Essar Power, which currently has a generation capacity of 3,910 MW, has plans to scale it up to 6,700 MW and is betting on the extra cash from its expansion plans to help service its debt in the future. Essar Power reported a net loss of R512 crore in fiscal 2013 vs a profit of R335 crore last year, citing higher interest costs and losses sustained by the company's Salaya power plant.