Get triple-A ratings on rent

US insurance cover can help trim overseas debt cost.

Indian companies now have the option of "buying" a triple-A rating and bring down the cost of their overseas debt issues. All they need to do is buy an insurance cover offered by general insurers in the United States. The cover offers the investors in debt instrument, a guarantee of triple-A quality of assets.

"It's like taking a triple-A rating on rent from insurance companies in the US enjoying the topmost rating. This has become possible with Moody's having assigned investment grade rating (Baa3) to India. The bond insurance is extended to issues independently rated as investment grade," said Gautam Chand, chairman & CEO of Instanex Insurance Brokers.

A large Indian metals company will be the first to buy this cover for its overseas debt issue to be launched soon.

The issuer of the bond can save at least 25 basis points in interest cost of funds after factoring in the cost of insurance. Bond insurance provides a saving of up to 75-90 basis points in cost of funds. Renting of triple-A rating from an insurance company would cost about 50 basis points, thus leading to a saving of 25 to 40 basis points.

The insured bond issue automatically gets the triple-A rating, based on the triple-A claims paying ability of the insurer.

The financial guarantee insurance policy assures investors that if the issuer of an insured bond fails to make any scheduled principal or interest payment, the insurance company will make the payment on time and in full. The guarantee is irrevocable and covers various types of risks.

Bond insurance is defined as an insurance policy underwritten by an insurance company which guarantees a bond in the event of default by the issuer. It is a form of credit enhancement in some cases achieved through guarantees from banks. However, banks in India are not allowed to provide guarantees for external commercial borrowings.

"The US insurance companies may ask for collaterals like lien on future cash flows as well as on assets. The collateral offered for the bond investors might be sought by the insurer for itself," Chand said.

Apart from reducing cost of foreign currency debt, bond insurance acts as a bridge to gain access to offshore financial markets in any currency and provides greater leeway for borrowing using the same pool of assets as collateral.

The insurance against default is unconditional and irrevocable that allows investors to build international exposure without undertaking major due diligence.