With a billion-dollar deal by Reliance Industries (RIL), India Inc’s desire to tap foreign funds received a new spark. While India’s largest firm by enterprise value could successfully negotiate with US investors, owing to the enormous deal size and strong market standing, relatively smaller firms would mostly rely on non-US investors for their funding.
Top arrangers in the country think the improved risk appetite of global investors could lead to more than $2 billion being raised by Indian firms in the next two-three months. “The investor sentiment has improved due to political backing on the Greek austerity package and improved liquidity through long-term refinancing by the European Central Bank,” Manmohan Singh, managing director and head of debt, capital markets, RBS India, told Business Standard. RBS is the largest merchant banker for foreign debt issuances in the country.
Interestingly, this year is likely to see a shift from traditional bond issuances carried out entirely in the US to dollar bond offerings outside the country. It may also see bond issuances in currencies other than the dollar due to increased investor confidence in lower rated Indian firms in these markets. This makes the coupon more affordable for the firms.
RIL had recently said $1-billion of bonds issued by its subsidiary, Reliance Holdings USA, were subscribed nearly eight times in the US.
Rural Electrification Corporation (REC) recently raised $200 million through Swiss bonds with a maturity period of five years and a coupon rate of 3.5 per cent. The coupon available in the US, excluding the hedging cost, stands at 5.5 per cent even for top rated firms in the country. Though the Swiss market offers funds at a lower rate, the issue size is much smaller compared to dollar bonds, because of a small investor base.
“The investors lap up the bonds and match our tenor and ticket size requirement at a rate much lower than that available in the US market,” said H D Khunteta, finance director, REC. Besides the Swiss franc, the Singapore dollar is also being eyed, though no deal has been reported so far. Companies keen to diversify their debt exposure may look for such opportunities, said top arrangers.
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More companies are likely to follow in REC’s footsteps. Infrastructure Development and Finance Company and Power Finance Corporation are expected to tap foreign funds in the coming months.
Banks, too, are expected to raise money abroad through medium-term notes. These may also be the early birds in raising funds through Singapore dollar-denominated bonds, due to a better understanding of financial markets. “Banks may look to raise funds in Singapore dollars. There is ample liquidity with retail investors in Singapore, and they are seeking avenues to invest excess funds. Banks have the expertise in cross-currency swaps and hedging and, therefore, these may be the first to raise funds in the currency,” said Varun Varshney, vice-president of the credit trading team (fixed income division), Nomura.
Lenders that have been delaying foreign issuances since last year may hit the market now. “Issuers that have updated their MTNs (medium-term notes) do have the flexibility of quick execution," said RBS’ Singh.
Arrangers say Union Bank of India, Bank of India and IDBI Bank would soon conduct roadshows in Hong Kong and Singapore and raise funds through Reg S bonds (bonds or stocks offered to non-US residents and qualified institutional buyers under an exception to US securities laws) to access cheaper funds. Merchant bankers feel the instrument is cost-effective and gives an opportunity to smaller issuers not well known in the US market to raise money abroad.
A senior State Bank of India official said the bank was waiting for rates to soften before it tapped the foreign market. "We will go to the market in the current year as the situation improves and interest rates turn attractive abroad. Though the amount is not decided, it would be a benchmark issue," said Hemant Contractor, managing director and group executive (international banking), SBI. Benchmark issues are worth at least $500 million.
"Mid-sized companies and banks may raise funds via Reg S bonds. These save on the costs involved in complying with the rules and regulations that have to be abided while issuing dollar bonds 144A or bonds that are issued purely to investors in the US," said Nomura’s Varshney.