Foreign borrowings spree seen continuing

Small firms eye $50m FCCBs

With approximately $4 billion having been raised by Indian companies through external comercial borrowings (ECBs), bonds and foreign currency convertible bonds (FCCBs) in the first half of the current fiscal, bankers see a similar amount being borrowed in the second half.

Around ten big corporates and about a dozen mid-tier firms are poised to tap the dollar market despite the fact that it is now marginally cheaper to borrow locally than it was around six months back.

Most of the smaller companies are looking at FCCBs in quantums of between $40 -$50 million, with the demand for Indian paper is likely to be strong in the wake of $2 billion of Asian paper being redeemed in the next couple of months.

Bankers say that it is slightly more expensive now to borrow overseas, since the cost of the five year cross-currency swap has moved up in recent weeks to around 5.6 per cent, compared with around 4.25 per cent six months ago.

This has driven up the total cost, for a AAA corporate to around 7.12 per cent (inclusive of the withholding tax), compared with less than 7 per cent for rupee loans. The swap rate has moved up because of the view that the rupee could depreciate and dollar interest rate could move up.

However, with corporates, especially public sector companies, aiming at broad-basing their resource base, tapping new classes of investors and establishing a presence in the oversaes markets, the differential does not deter them, say bankers.

As for the FCCBs, bankers observe that this time round the coupon rates on the debpt portion could be higher than corporates managed in the last six months since the US treasury has moved up in the interim.

Moreover, the conversion premium which companies commanded earlier will be lower this time. Incidentally, most of the FCCBs issued by Indian firms are trading at a discount in the secondary market because of the US treasury rates having gone up and also because the share prices of some of these firms in the domestc markets are lower than they were at the time of issuance. Despite this however, bankers say there is a good appetite among hedge funds and FCCB-specific funds for quality paper.

In fact, bankers observe that the process of issuing FCCBs has now changed into what is called a "delayed settlement process" by which the issue is first priced and subsequently a prospectus is issued and road shows held. earlier, the pricing was done after the prospectus was issued.