Cheap loans scarce, firms rush for foreign bonds

In first half of year, firms raise more than banks on low US treasury rates

As securing cheap term loans from banks has become difficult amid tightening regulations, Indian companies are turning aggressive in foreign bond markets. Traditionally, the foreign fund-raising route has been dominated by banks, which lend the funds raised to companies as term loans.

Earlier, only top-rated investment grade companies participated directly in the foreign bond market, as these were able to raise funds at cheap rates. Largely, companies stepped into the bond market to raise long-term debt (of maturities exceeding five years), as short-term debt was available from banks (term loans).

Reliance Industries, a regular participant in the US dollar denominated bond market, raised $800 million through perpetual bonds in January this year. The funds were raised at a coupon rate of 5.875, as it was rated investment grade (Baa2 and BBB +) by Moody’s and S&P. This year, city-based technology firm Rolta India raised $200 million dollar-denominated bonds with five-year tenures, at a coupon rate of 10.75 per cent. The company was rated BB- by S&P, considered speculative grade (implying substantial credit risk). (BOND BUYING)

“This year, companies have been very active in the bond space, surpassing banks in terms of total amounts raised,” said Randhir Singh, head of financing at Deutsche Bank.

So far this year, eight Indian companies have tapped the dollar-denominated bond market, together raising $6.64 billion. By comparison, seven banks, including HDFC Bank and State Bank of India, raised $4.6 billion in the same period. Last year, three companies —Reliance Industries, Bharat Petroleum and NTPC —together raised $1.8 billion, while eight Indian banks had together raised $5.35 billion.

Tata Group companies Tata Motors, Tata Communications and Tata Steel have also raised money through the issuance of Singapore dollar-denominated bonds. Besides, Tata Motors’ Singapore based subsidiary TML Holdings Pte, which owns UK-based Jaguar and Land Rover, is in talks to raise about $500 million through syndicated term loans.

“Globally, regulations are becoming tighter under Basel-III guidelines and banks are finding it difficult to disburse cheap loans to corporate clients,” said the head for debt capital markets at a foreign bank, on condition of anonymity.

This year, Indian companies have raised foreign syndicated term loans worth $15.8 billion, against $17.6 billion in 2012. The trend of Indian companies scouting for cheaper funds abroad in both the bond and the term loan markets is likely to acquire greater momentum in the near future.

‘Dollarising’ balance sheets
“We know some corporates are looking to dollarise their balance sheets, as they have a lot of high-cost rupee debt, while their revenues are linked to the dollar. So, they are exploring solutions in loans and bond markets to refinance rupee debt with dollar debt,” said Madhur Agarwal, head (debt capital markets), JP Morgan India.

This year, the rush for US dollar-denominated bonds was also due to rates becoming more attractive compared to last year. At the beginning of this year, the benchmark 10-year US treasury rates stood at about 1.75 per cent; the rate remained low till May and the period saw seven of the eight companies, including Bharti Airtel and Vedanta Resources, tapping the bond market.

Bharti Airtel had tried to tap the market last year, too, but it didn’t find the rates favourable at that time. This March, however, it raised $1 billion for 10 years, at a coupon rate of 5.125 per cent. Vedanta Resources raised $1.2 billion and $500 million through 5.7- and 10-year tenured bonds, respectively; the coupon rates were six and 7.125 per cent, respectively.

However, the rush for the bond market slowed after May, amid fears the US Federal Reserve would taper its bond buying programme. This led to the benchmark 10-year US treasury rate touching a high of three per cent in September. Typically, bond issuances are priced higher than US treasury rates. But with the tapering being postponed, the rush to the market is expected to return.

“Though spreads have come down from the peak September level, these are still higher than in April-May. That is why a number of issuers are still on the sidelines, waiting for the markets to improve further. Maybe in January, we could see a lot more issuances,” said Agarwal of JP Morgan India.