Blue-chip firms buy back rupee debt after price slump

By Archana Narayanan

MUMBAI (Reuters) - Blue-chip companies have begun buying their own debt, taking advantage of steep price drops since the Reserve Bank of India's cash-draining steps last month and offering a glimpse of hope to battered credit markets as more firms look to follow suit.

Reliance Industries , L&T Finance Holdings and Tata Capital, part of the Tata conglomerate, have bought back around a combined 21.75 billion rupees of debt since late July, dealers said.

"The credit markets, which are otherwise in a freeze, are getting a relief from these buybacks," said Ajay Manglunia, head of fixed income at Edelweiss Capital.

The buybacks follow the plunge in debt prices after the Reserve Bank of India on July 15 raised short term rates and drained cash from the banking system to prop up the rupee.

While the measures have failed to support the rupee, which hit a record low this week, bond yields have surged, battering corporate and investor sentiment.

The yield for three-month commercial paper has climbed to 11.59 percent on Tuesday from 8.43 percent on July 15. The benchmark AAA-rated 10-year corporate debt yield jumped to 9.60 percent from 8.70 percent, dealers said.

"Buybacks are offering investors an avenue to exit near maturity assets and invest at attractive yield levels in longer duration while the RBI measures last," Manglunia said.

Further corporate buybacks could help restore confidence at a time of uncertainty about how long RBI measures would remain in place, especially after the rupee hit a new low of 61.80 on Tuesday.

Non-bank financial firms Cholamandalam Investment and Finance Company Ltd and Sundaram Finance are also looking to buy back debt from the market, dealers said.

"Since the yield curve has moved sharply higher, cash-rich firms are making profits by buying back their own debt," said Ashish Jalan, a manager at fixed income at SPA Securities.

"They are earning a clean 200 to 250 basis points arbitrage by borrowing at the base rate and deploying at higher rates."

L&T Infrastructure, part of engineering conglomerate Larsen & Toubro , bought back short-term maturity debt worth 3 billion rupees at a yield between 11-12 percent, representing a sharp discount to the original issue price, a source with direct knowledge of the transaction said.

Meanwhile, L&T Finance has bought back 1.15 billion rupees in bonds and 9 billion rupees in short-term commercial paper since the end of July, a source with direct knowledge said.

Tata Capital bought back more than 6 billion rupees of debt maturing in August, a source with direct knowledge said.

Reliance Industries, controlled by Mukesh Ambani, India's richest man, bought back around 1.5 billion rupees of five-year debt maturing in November at a yield of 11.5 percent from an overseas investor, a source with knowledge of the deal said. They were issued at 11.45 percent in 2008.

(Editing by Tony Munroe & Kim Coghill)