Firms head back home as Libor, forwards rise

Top Indian corporates, which had plans to tap foreign currency borrowings, are heading back home to raise rupee term credit through bonds and bank loans.

Triggering the shift away from external commercial borrowings (ECBs) are the rising international interest rates and domestic forward premiums.

The simultaneous increase in both the London inter-bank bid offer rate (Libor) and forward premiums in the local forex market, which has shot up to over 2 per cent, nullifies the interest rate advantage corporates were seeking by tapping foreign borrowings.

Hindalco, Tata Motors, Tata Power, Indian Railway Finance Corporation (IRFC) and Associated Cements Company have shifted to rupee borrowing, said merchant bankers.

Hindalco has already raised Rs 250 crore at 6.5 per cent for 5 years, IRFC plans to raise Rs 500 crore for a longer tenure of 15 years with a 10 year staggered repayment. Tata group companies have plans to raise Rs 1,000 crore through 10-year bonds.

"Local market issuances have increased as more corporates are looking to raise funds domestically unless they are targeting solely international investors or have a large appetite for capital," said Kausik Modak, principal & head debt capital raising global markets group - India, Bank of America.

Though the cost of raising funds domestically has also risen, a marked shift is seen in the preference for corporates to borrow domestically, said senior merchant bankers.

Public sector companies, especially oil firms, have a large appetite for funds and continue to prefer the overseas borrowing route. Oil companies have imports payments to be made in dollars, and for them it makes sense to go for dollar loans. "Many PSUs do not wish to load a single market with one market borrowing programme," said Modak.

The cost comparison on a floating rate ECB works out to 6.3-6.5 per cent for AAA borrower raising five-year loan. This includes 2.01 per cent Libor for six months, 2.50 per cent forward premium for six months, withholding tax of 20 per cent (0.20) and bank margin of 1.60 per cent. Bank margin differs from bank to banks and customer to customer.

In contrast, AAA corporates could raise a 5-year loan from the domestic market at 5.4-5.6 per cent. Earlier rates had gone up to 7 per cent owing to the sticky government securities market. This was, however, considered to be more of a temporary blip. Even banks can raise rupee loan from the banking system at 6.5/6.7 per cent for five years.