As the overseas debt market opens up, companies are using the opportunity to raise long-term debt (five-year funds) abroad, as they expect local interest rates to go up.
Recently, Reliance Industries is said to have tied up over $1 billion in overseas debt, while State Bank of India is raising a similar sum. Tata Motors plans to raise $1 billion through a combination of debt, equity and convertibles, while JSW Steel is looking at raising $200 million-$250 million via overseas debt.
Seshagiri Rao, joint MD & CFO, JSW Steel, said the ECB (external commercial borrowings) market has opened up and companies are raising loans. ‘‘Earlier, it was difficult to get five-year loans from banks. But today, many banks are approaching companies and are willing to look at five-year loans,’’ he said.
Vivek Batra, head (institutional banking group), DBS Bank India said the appetite for capital continues to be high among Indian companies. ‘‘Foreign currency loans are a popular route to raise long-term debt as they provide an alternate source of funding at attractive rates. Over the last 18-24 months, there have been several such transactions in the smaller $10 million-50 million range undertaken by the Indian mid-market sector and funded largely on a bilateral basis with individual banks,’’ he said.
‘‘The appetite for large ticket, syndicated transactions, which typically have several banks and financial institutions participating, had noticeably reduced. These larger deals are now staging a gradual comeback with top tier corporates leading the way,’’ Batra said.
The key driver is spreads, which had gone up to 400-500 basis points over the Libor (London Inter-Bank Offered Rate, a benchmark for overseas debt), and have come down to about 190 basis points. Also, banks’ balance-sheets are in better shape today.
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Yet, it’s only the Japanese banks and banks based in Singapore that are lending and not European or American banks, who are more willing to do syndication, said sources. These include banks like Credit Agricole, BNP Paribas, Standard Chartered and Japanese banks like Bank of Tokyo Mitsubishi, DBS, Sumitomo Mitsui Banking.
Asian banks are being tapped as their ability and willingness to participate in such transactions is higher. ‘‘However, overall dollar liquidity continues to remain tight, and going forward, we expect small-size ECB transactions to continue to be funded through bilateral deals, mid-size transactions through club deals and only those large transactions which are being driven by strong companies, enjoying high credit ratings, will opt for the syndicated route,” said Batra of DBS Bank India.
Borrowers are keen to tie up overseas debt as they expect interest rates to harden in India and there’s big arbitrage available between ECBs and rupee loans. The ECBs, even on a fully-hedged basis, could be cheaper by 200-300 basis points than rupee loans. According to RBI data, companies raised $650 million in May, which was higher than May 2009, and shows the market is picking up, but there is not a big jump.
‘‘The market has selectively opened up and companies want to raise money through convertible bond offerings or plain vanilla debt. But this window is available only for investment-grade, level-one companies. Not everyone can raise money,’’ said Arvind Parakh, director, JSL Ltd. ‘‘Once things become more stable, in say six months, level 2 or level 3 companies may be able raise money through ECBs,’’ said Parakh.
Rahul Agarwal, senior manager (ECB), AK Capital Services, a merchant banker for debt and fixed income securities, said many infrastructure firms that are setting up power plants or road projects are looking at raising ECB funds, but they have to pay higher spreads (500 basis points) for money for more than five years’ tenure.
Five-year tenure loans would cost an infrastructure company 9.20 per cent versus 11 per cent for rupee loans. It could save 200 basis points on interest costs if it decides to leave either the foreign exchange risk or the interest rate risk open. Many leave the exchange risk open as they expect the rupee to appreciate in the long run. A company putting up 1,000-Mw power project would need a debt of Rs 2,800 crore. A 200-basis point saving in interest costs could translate into savings of Rs 50 crore every year.
‘‘If infrastructure companies are allowed to refinance rupee loans with ECBs, it will be a big push for infrastructure sector,’’ said Agarwal. Right now, companies are allowed to refinance an ECB with a new ECB loan. In many annuity road projects, the annuity (revenue) is fixed over 20-25 years but if interest rates go up sharply, the project can become unviable. Such projects would like to refinance their rupee loans.
For banks, the good news is that $500 million worth of ECBs are due for maturity in the second quarter of FY11 (June-September quarter), which provide banks an opportunity to refinance or roll them over. Many would like to take this opportunity, but the problem is foreign banks who can lend at lower rates are not ready to lend beyond five years as the loan market in India is not developed, and if they want to exit after five years, they can’t do so.