For loans bankers, it’s been all about India since August, and not just because of the rupee’s tumble against the dollar. No, bankers have been gripped by the vast number of state-owned corporates that are flooding the dollar loan market. Bharat Petroleum Corp (BPCL), Hindustan Petroleum Corp, Indian Oil, Oil India and ONGC Videsh are but just a few of the names that are looking for a loan.
While the majority are still in the bidding stage, BPCL mandated a group of seven lenders at the end of September to help arrange its $500m multi-trancher. While the deal’s size is certainly not hefty and the use of proceeds is only for working capital, the pricing of between 200bp-225bp over Libor has provided some much needed respite to the loan market.
The reason? The margin is double where most of the previous loans by Indian state-owned credits have been priced this year, which have come in the 100bp range over Libor. For example, in mid-September, Indian Oil took out a similar size loan to BPCL’s with a 95bp margin over Libor.
But thanks to BPCL, many in the market are cheering on what seems to be the beginning of a price correction for Indian loans. This stems from the fact that BPCL priced its deal at a time when it was forced to take into account the impact of the rupee’s devaluation and deteriorating global sentiment towards Indian credits.
At the other extreme, Indian Oil was lucky when it managed to lock in pricing when the rupee’s volatility had not had far-reaching consequences, and the aftermath of the announcement of tapering of quantitative easing was limited among Asian banks.
Not that that’s all bad news. While concerns over QE tapering lead to outflows worth billions of dollars from the India’s equity, bond and currency markets, it has also delivered some long overdue relief for loans bankers in the form of a stabilisation — or even a correction — in pricing. Lenders will no doubt be quick to use BPCL as a benchmark for future deals, and the upwards move in pricing is likely to continue.
One reason for this is that with close to $5bn worth of deals in the pipeline — all from Indian state-owned issuers — a glut of names can cause liquidity to slowly but steadily dry up. And if all the names come to the market in quick succession, as has been the case so far, lenders are sure to become more selective in their choices. SOEs will have no choice but to start paying up to get their deals past the finish line.
Thanks to BPCL’s deal — heralded by many as the change-agent for the Indian market — interest in the country’s names can broaden. The rise in pricing is good for the loan market, because it means banks are correctly pricing Indian credits and the problems engulfing the country — ranging from a wide current account deficit and slow pace of structural reforms to currency volatility and high inflation.
Paying up more will of course be painful for publicly-owned groups, which have been spoilt by the excessive attention showered on them by Japanese banks — always staunch supporters of their deals and sometimes even clubbing them with one or more Indian banks rather than launching into the wider market.
And while that interest will not fade, Japanese banks will also start facing limits on how much they can lend to India making the need for new sources of credit inevitable.
With the Reserve Bank of India breathing down the necks of SOEs to shore up on dollar reserves, companies are certain to see their funding needs go up. Unfortunately for them, so too must the pricing.