Lower cost a plus for these small-ticket borrowings in today’s macroeconomic uncertainty.
Loan syndication from abroad appears to be the flavour of the season, after the euro zone debt crisis and the downgrading of US sovereign rating has raised doubts on investors’ appetite for foreign currency bonds issued by India Inc.
Domestic banks and corporate entities are increasingly raising money through syndicated loans abroad to meet funding requirements. A relatively good investors’ appetite for these small-ticket loans and their cheaper cost have made these contracts popular among Indian companies, bankers say.
“Typically, you get your investors from Taiwan and Singapore (for syndicated loans), with decent cost differentials as compared to a bond. Though one does compromise on size in a loan market, it is adequately compensated by way of cheaper cost of funding and diversifying the investor base. This trend has definitely caught up,” said Sunil Agarwal, managing director and head, institutional client group, at Deutsche Bank in India and Sri Lanka.
The average size of a fund raised via a syndicated loan is $100-250 million, while the tenure is for one to three years. Through foreign currency bonds, issuers can raise more money with longer maturity.
SHIFTS
The uncertain global macro-economic environment has shifted investors’ preference towards short-term debt. “The euro zone debt crisis and downgrading of the US sovereign rating may lead to a decline in overseas bond issuance in the short term, but the long-term outlook remains positive,” said Vedika Bhandarkar, vice-chairman and head of investment banking at Credit Suisse in India.
“(But) there is demand for Indian paper. Companies are also looking at syndicated loans as an option to raise funds in the international markets. While investors have become more selective, they still have enough appetite for these fund-raising programmes,” she added.
Bankers said with the lack of investors’ appetite for large-ticket issuances, companies are also looking to raise money in small tranches through multiple loan syndications.
For instance, Rural Electrification Corporation (REC) raised $300 million from investors in Singapore and Hong Kong at 180 basis points above the six-month Libor (London inter-bank offer rate) in August. The company plans to raise another $250 mn by mid-October through this route at 195 basis points above the six-month Libor. The company has given State Bank of India a mandate to manage the issue.
“Inclusive of all costs, the rate of raising funds through loan syndication comes to 7.5 per cent currently. One also has an advantage of lesser witholding tax, as compared to dollar bonds,” said H D Khunteta, chairman and managing director of REC.
The witholding tax burden is 10 per cent for overseas loans, as compared to 20 per cent in the case of foreign currency bond issuances. The Bank of India also raised $200 mn through the same route recently.
“The rates on overseas loans have marginally worsened but it’s possibly lesser than the increase in coupon rates on dollar bonds. Given the way the swap curve has come off sharply for some companies here, it does provide an opportunity on a fully-hedged basis,” said Nirav Dalal, managing director, debt capital and financial markets, at YES Bank. Yesterday, the six-month US Libor was at 0.49 per cent, down from its peak of 0.76 per cent in June last year.
