A relaxation on offshore borrowing rules will give India’s telecommunications companies financial relief to pay for their second generation (2G) spectrum auction bids, although borrowing may be measured since these companies are already struggling with rising debt.
The revamped rules are part of the government’s efforts to boost funding sources for the indebted telecom sector to help it pay for their 2G bids in the auction, which was held on November 12. The country’s Supreme Court nullified the first sale in 2008 sale due to a corruption scandal, leaving public sector banks to suffer US$2 billion in losses to operators to pay for their 2G bids, according to Moody’s.
To increase the funding options for these mobile operators for the second round of bidding, the finance ministry announced on November 9 that it will allow the telecom companies to access offshore bank loans, which are also known as external commercial borrowings (ECBs).
The government imposes a cap on the amount that onshore companies can borrow from overseas lenders. These ECBs cannot have a coupon rate exceeding 500 basis points over Libor, with the exemption of infrastructure companies. But that cap has limited a majority of Indian firms from tapping overseas lenders. Telecom operators will now be given preferential treatment as well, a move that market players welcome as a development to the cash-strapped industry.
“I’m sure we will see one or two [companies seeking] ECBs at US$200 million-plus eventually,” said a senior debt capital markets banker based in Mumbai. “They could do either a rupee bridge to an ECB take out or an ECB bridge to an ECB takeout.”
The interest costs will vary on a case to case basis depending on the credit profile of the individual companies such as market position, profitability, leverage and parent support and the challenges with the Indian telecom industry like competition and regulations, said Mehul Sukkawala, a director of corporate ratings at Standard & Poor’s.
“If you then convert that [a dollar loan] to a fully-hedged rupee, you add another six percent. So the equivalent cost of a 5% ECB [in rupee terms] will be six plus five, which is 11%. I would be surprised if they would be able to borrow at 11% in rupee terms,” said the banker, since the base rate for Indian banks is currently 10%. “I don’t think the borrowing will be so significant so I think they’ll be able to achieve value at tight pricing,” said the banker, who added that corporations will be able to save at least 100 basis points.
It also depends on whether the company will hedge the loan and how much that will raise the cost of accessing ECBs, since telecom operators will have to pay the foreign currency loans with their rupee-denominated cash flows.
“For example, Bharti Airtel has not hedged most of its foreign currency loans, and that’s something which we don’t see positively,” said S&P’s Sukkawala, adding that hedging costs have risen amid increased volatility in the rupee.
The company, like many of its peers, is “very highly leveraged,” according to Sukkawala, as its net debt of INR146 billion (US$2.7 billion) maturing over the next 12 months. Its debt to Ebitda ratio is as high as 3.5%.
S&P’s Sukkawala said the chances of obtaining competitive pricing on a foreign currency loan may be increased if the parent companies if the mobile operators provide a guarantee.
“There are some companies that are supported by parents abroad so if the parents abroad are comfortable taking the risk, as in maybe they want to guarantee or provide some support, in which case they [the banks] might not have such a big issue giving a US dollar loan because they are going to be supported.”
Indian telecommunications operators have borrowed significantly to build mobile phone networks, but regulatory uncertainty, fierce competition and low customer charges have weakened operator cash flows.
Pricewaterhouse Coopers expects the debt to swell to INR4 trillion (US$72 billion) by March 2016 from INR1.9 trillion in March of this year, according to the Economic Times. That has left India’s local banks less enthusiastic about lending to the telecom sector. But foreign cash should provide the sector with much-needed funding, and operators will try to take advantage of the new rules.
The finance ministry’s moves come after the Reserve Bank of India had approved a proposal to allow mobile phone companies use the up-for-sale airwaves as collateral for any lending. In the event of a default, banks would be able to seize the airwaves and then will have the right to use the asset to recoup their losses in any way they feel fit without any restrictions.
Despite industry challenges, foreign banks will be ready to provide India’s telecom companies with loans amid views that the sector may be on a path to recovery.
“There obviously will be concerns, but we’re down to relatively few players at the moment. So those that are left are likely to be bidding [for] the top –tier [names],” said another Hong Kong-based banker. “The general consensus is that the worst is behind us on the telecoms issue and it’s an industry that’s here to stay. I don’t think there is going to be a blanket refusal to lend to these telecom companies.”
“If the names are established, I don’t think that being an issue in rupee or dollar appetite. Dollar would be more conservative but I don’t think there will be large volumes needed to borrow. I don’t foresee a problem.”
The finance ministry is hoping that the ECB changes will help the government attract the INR40 trillion it had initially planned on obtaining through telecom auctions for this current financial year to help control a burgeoning fiscal deficit.
India’s budget deficit grew to 5.8% for the financial year ending March 31, 2012. The finance minister said he was determined to halve it in the next five years.