Global loans once again flowing for Indian cos
The Economic Times:June 15, 2009
Mumbai: Global money markets are fast becoming favourable for Indian companies to borrow, with bankers saying it’s only a matter of time before the tap opens again.
The premiums above the London Inter-Bank Offered Rate (Libor), a benchmark used by bankers for pricing corporate loans, have fallen significantly over the past few weeks.
Already, ICICI Bank’s Credit Default Swap (CDS), widely considered as the benchmark for measuring investor appetite for Indian debt, has fallen to levels before investment bank Lehmann Brothers succumbed to the global financial crisis and filed for bankruptcy on September 15, 2009.
“There has been a perceptible improvement in the market situation favouring emerging markets with India being a relative outperformer among them,” said Hemant Mishr, head of global markets at Standard Chartered Bank.
The return of the Manmohan Singh government without the support of anti-reform Left parties after the elections has added to the confidence about Indian companies, he added.
Sunil Makharia, executive vice-president for finance at pharma company Lupin, expects Indian companies to hit the foreign loans street soon as foreign currency loans are slowly becoming more economical than local ones.
In the past three years, Indian companies have raised close to $70 billion through syndicated loans in the international markets. The two Reliance groups, led by Mukesh Ambani’s Reliance Industries and Anil Ambani’s Reliance Communications, together accounted for more than a half of these borrowings.
There was, however, hardly any deal since September last with the global money market almost freezing after the Lehmann collapse.
The market had turned risk averse, with bankers charging hefty premiums (technically called spread) over Libor. Overnight, the rates for five-year loans had jumped from 200-250 basis points above Libor to 700-800 bps, bringing to the market to a grinding halt.
The running rate for five-year loans is around 300-400 bps, with bankers suggesting that it would soon come down to pre-Lehmann collapse levels.
At the current levels, however, the cost of borrowing abroad is still higher than a local loan. Consider an AAA-rated Indian company needing funds for a five-year period. The cost of an overseas loan would be around 12% a year, including the hedging for the interest rate and currency risk. The same would be available at 9-10.5% from local loans and still lower if the company sells its bonds.
However, the gap is reducing. While the spread over Libor is expected to contract further, the strengthening rupee is already reducing the hedging costs, said Mr Mishr.
Another evidence that perception of Indian companies is improving overseas is evident by movement in ICICI Bank’s CDS that is traded in global markets. Its the market’s estimate of insurance for loss on a securities in the event of its default.
The CDS, which quoted in a range of 80-100 bps throughout the whole of the last bull phase, had risen to nearly 1800 bps (18%) after Lehmann collapse. On Thursday, it quoted at 254 bps. This is a level last seen in December ‘07.