The euphoria over offshore bond issuances may fizzle out, as rising swap rates have made conversion of fixed-rate bonds into floating rate liabilities expensive.
Indian banks, which raised the bulk of the funds through foreign bond issuances so far this year, typically swap the proceeds of fixed-rate bonds into floating rate liabilities to reduce interest rate risks. With swap rates increasing, owing to global uncertainties, banks are unlikely to raise money through this route soon, despite coupon rates on foreign bonds remaining below the rates currently offered on Indian papers.
“The current environment is conducive for fixed-rate issuers who do not have the compulsion to convert their borrowings into floating liabilities,” said Sunil Agarwal, managing director and head (institutional client of the group) at Deutsche Bank in India and Sri Lanka.
According to Bloomberg data, the US fixed-to-floating rate for one year is currently 0.47 per cent, a rise over the near-two-year low of 0.35 per cent in May.
“Banks are not thinking of raising funds abroad, as spreads have gone up,”said a senior official in charge of the treasury department of a state-run bank in Mumbai. He added currently, the all-in cost rate for a five-year bond would stand at a minimum of 300 basis points above the London interbank offered rate. Spreads have hardened by 40-50 basis points in the last six months.
Raising funds through foreign currency bonds was popular among India Inc in the first six months of this year, since interest rates remained soft in foreign markets, even as domestic rates continued its rise.
While companies are not compelled to convert fixed-rate bonds into floating rate liabilities, the euro zone debt crisis, coupled with the downgrading of the US sovereign rating, has cast a shadow on their foreign fund-raising programmes. "Many companies are delaying their plans to raise money through foreign bond issues, considering the events in Europe and the US. Most of these are prepared to launch their issues as soon as the market improves," said an official in charge of debt capital markets at a foreign bank.
Currency swaps have also turned more expensive, as the dollar depreciated against currencies like the Swiss franc in the last four months. The US dollar depreciated to 1.27 per Swiss franc, compared with 1.09 as on March 31. As a result, swap rates for converting money raised through Swiss franc bonds into dollars have become more expensive.
Bankers, however, are hopeful that even a slight improvement in the sentiment would prompt Indian companies to raise funds through offshore issuances again. “The trend is offshore is proving to be an attractive source of funding for India Inc. Total offshore borrowings by Indian issuers so far this year have already surpassed the borrowings in 2010,” Deutsche Bank's Agarwal said, adding, “Currently, the market is volatile and uncertain. But if we step back and look at the dynamics, looking at where US treasury is right now, the absolute coupon on the borrowing makes a compelling case for foreign issuances.”
