Foreign borrowing by Indian companies is back to its pre-crisis levels, driven by easy liquidity overseas and a favourable differential between domestic and international interest rates.
With domestic rates trending upwards, Indian borrowers are likely to continue to favour international debt markets. In the first six months of the current financial year, Indian companies raised a total of $10.65 billion (Rs 47,350 crore) through External Commercial Borrowing (ECB) and Foreign Currency Convertible Bonds (FCCB), according to data released by the Reserve Bank of India (RBI). During the same period last year, they’d raised $7.32 billion (Rs 32,450 crore).
In April-September 2008, before American investment bank Lehman Brothers collapsed and froze overseas credit markets, companies raised a total of $10.96 billion from foreign lenders and investors.
“There are a bunch of reasons why there is strong appetite for overseas loans. Credit spreads have narrowed compared to last year and overseas lenders are still flush with liquidity. Capital expenditure plans of companies, on hold through most of last year, are also back on track,” said a senior executive of Standard Chartered Bank.
Indian lenders are also rising to the opportunity, with a spate of foreign currency-denominated bond issues by banks in recent months. Indian banks typically use the proceeds of dollar bond issues to lend to Indian companies with operations overseas.
During September, Indian companies raised $3.09 billion (Rs 13,750 crore) from foreign investors, the highest figure in the current financial year so far.
The biggest borrower was Reliance Industries which tied up a $1-billion, seven-year loan. Other large borrowers in September were Rural Electrification Corporation, which raised $400 million and Jhajjar Power Ltd, which borrowed $188 million. Reflecting the bearish trend in FCCBs, there were no FCB issues during the month.
Although the past few weeks have seen heavy fluctuations in currencies, pushing up hedging costs for borrowers, investment bankers say rates on loans denominated in foreign currencies are still favourable, compared to domestic rates.
Borrowers typically hedge and swap their foreign-currency floating-rate loans into rupee-denominated fixed rate ones, to protect against currency and interest rate risks.
Trend to continue
“Domestic rates are on the upswing, so companies still find overseas rates favourable. Also, corporates are increasingly choosing to keep some of their liabilities in dollars, which eliminates the need for hedging,” said a senior investment banker.
With domestic rates having stiffened significantly over the past few months and likely to rise further, Indian corporates are likely to continue to favour the overseas debt markets.
The borrowing needs of telecom companies, which piled up a debt of more than Rs 1 lakh crore for 3G and BWA spectrum earlier this year, are also likely to increase ECB volumes.
Telcos, which predominantly relied on short-term loans and commercial paper issuances to pay for the spectrum, are likely to re-finance the bulk of their debt with foreign borrowing.
However, while there is plenty of appetite among borrowers and lenders for foreign loans, the FCCB market is almost at a standstill. A raft of issuances in the second half of 2009 had sparked hopes that these were back in demand. The deal flow since has not kept pace with expectations.
Inherent weakness in the foreign debt market and stiffer conditions demanded by investors were likely to keep volumes subdued, said investment bankers.
Investors’ insistence on stiffer conditions is also a reason for fewer issuances. In addition, conversion premiums have come down significantly, as investors do not want to be saddled with bonds that they are not able to convert into equity because the conversion price is too high.
