Peak period over

Spreads are widening for Indian bonds overseas

Indian corporates are rushing to raise debt overseas, hoping to benefit from the lower interest rates prevailing abroad.

The National Thermal Power Corporation's (NTPC) recent debut in the international market with a $200 million, seven-year issue followed on the heels of IDBI's $300 million float. A number of other corporates are waiting in the wings.

But Indian firms may have missed the best time for their issues. This is because the secondary market spreads of issues overseas by Indian firms have widened recently.

ICICI Bank, which raised $600 million last year, timed the issue to perfection, with its five-year bond getting a very fine rate of 145 basis points over the 5-year US Treasury bond. But a foreign bank dealer pointed out that the ICICI Bank paper is currently trading at a spread of 160-165 basis points over the US Treasury.

Similarly, the recent $300 million raised by IDBI was originally priced at 150-160 basis points over five-year US treasury but the final pricing was at 185 basis points, said merchant bankers.

NTPC raised seven year funds through dollar bonds at 205-210 basis points spread over corresponding 7-year US treasury bond. While this comes to 5.63 per cent, it's interesting to note that in the domestic market, 8-year NTPC bonds are trading at 5.94 per cent.

Moreover, the change in appetite can also be gauged by the fact that while the Sources said while the ICICI Bank issue in last October was five times oversubscribed, the IDBI issue saw an order book of only $400 million and NTPC's offering closed with offers of $277 million.

Dealers in the overseas bonds market are of the view that the prices have not only firmed up for Indian papers but it has been the case for most Asian papers. This is because the country risk on these papers has gone up with elections being announced in a lot of places.

As for India, the prices have also gone up as withholding tax is adding to the overall prices and hedging cost has also increased. Last year, inclusive of the withholding tax, most of the corporates could raise money cheap as forward premiums on the dollar was nearly negative.

Another reason that is contributing to this is the withdrawal of bank guarantee for issues. This takes the sheen off a float for overseas investors.

Under the new ECB guidelines, banks are not allowed to issue guarantees for ECB borrowers. In case where such a guarantee is desired, it has to be approved by the Reserve Bank of India.

The lacklustre performance of the ICICI Bank and IDBI issues in the secondary market may lead prospective investors to be more cautious in future about flotations by Indian firms.

In fact, reports say that a number of investors in the IDBI issue preferred to sit on the sidelines because of the disappointing performance of its bonds in the secondary market.

Aluminium prices

Domestic aluminium prices have been hiked by Rs 3,000 per tonne. This non-ferrous metal is being viewed by analysts as playing the catch-up game. Other metals such as copper and tin have seen 60-80 per cent price rise globally in the last one year, but alumiunium has not kept pace.

Aluminium prices have risen 12 per cent in the first quarter of this year to $1,750 a tonne on the London Metal Exchange. It was traded at $1,425 in May 2003. Demand overseas has been driven by European durable goods and automobile companies.

Domestic aluminium prices, however, have risen due to surging demand for drawing rods (made from aluminium) "" this product is being purchased in large quantities by private sector players who are involved in ramping up their transmission and power distribution networks. Local prices have risen approximately 20 per cent over the last 10 months, not much when compared with other metals.

Unlike other metals, where the China factor has lead to a surge in prices, there's a reverse trend in aluminium. The Middle Kingdom's aluminium production is set to rise to 6.5 million tonne from 5.5 million tonne in 2003 "" and with consumption not keeping pace, there is a glut of metal.

Analysts point out that a further rise in aluminium on international exchanges is capped, until China takes steps not to flood the global market. Domestic aluminium manufacturers however, still have some leeway - locally made products are still Rs 8, 000 per tonne cheaper than the landed cost of imported substitutes.

The latest price hike is expected to boost the profitability of aluminium companies from Q1FY05. Taking a cue, several international investment banks have raised their outlook for aluminium stocks such as Hindalco and Nalco.

With contributions by Anindita Dey and Amriteshwar Mathur