Rising Libor forces firms to fix ECB rates

Companies, which had raised external commercial borrowings (ECB) a year ago, are feeling the heat of the rising interest rates.

Most corporates are rushing to change their interest rate structure from floating to fixed to avoid paying more on the face of a rising benchmark, the London inter-bank offered rate (Libor).

While most deals are struck with foreign banks as counterparties, few nationalised banks such as State Bank of India, Punjab National Bank and Bank of Baroda are learnt to be active in these swaps, said a foreign exchange dealer.

According to dealer active in loan syndication, the dilemma has arisen owing to the continuous rise in the Libor. From a few basis points a year back, the six-month Libor has gone up to 2.17 per cent and one-year to 2.45 per cent.

With an outlook for the dollar to appreciate, both on the back of rising interest rate in the US and soaring oil prices, corporates are scrambling for hedging the open credit risk.

A corporate treasurer said, "A year back, the combined cost of entire borrowing, including the margin for the banks, used to be around 3-3.75 per cent. Currently, Libor itself is over 2 per cent."

He added that there is first the need to save on the extra outflow towards interest payment as all ECB loans are pegged to Libor.

Under the swaps, corporates are changing their floating rate payments into fixed-rateones. "This is case of interest rate swap where a corporate is receiving floating rate payment from banks and is paying fixed rate to the bank. In the process, the corporate hedges the interest rate volatility arising out of the rising Libor as it is receiving the floating rate interest, which it will be paying back to the international lender of the foreign currency loan in specific intervals of time," a banker said. This is being ensured by the bank with which it is entering into the deal .

Most of the Indian corporate have rushed to the overseas loan and bonds market to raise borrowings last year when the rupee was appreciating to dollar and six-month Libor was in the range of 0.50-60 basis points. During that time, forward dollars in the Indian foreign exchange market was ruling at a discount.

Therefore, most of the corporates took advantage of the low interest rate scenario to raise dollars loans both for refinancing their high cost rupee debt. They are also using the dollar loans for capital expenditure.