Fewer primary transactions and a steady downward trend in returns for Indian loans has certainly made this year an opportune one for borrowers keen to refinance facilities sealed when markets were less benign.
This backdrop seemed perfect even for a leveraged credit such as Tata Steel, one of India’s largest steel producers, to try and cut costs. So when talks of repricing began, many were confident the company would be able to push through hassle free. It was a Tata name after all.
But the story has not turned out to be as straightforward. Banks were given until the end of August to provide new proposals on pricing and final terms were to be disclosed soon after. Tata is understood to have anticipated slashing price by 90bp-100bp, but lenders have been less than receptive. Negotiations have been delayed, according to sources, with banks only willing to go lower by 50bp-60bp.
While this poses a setback for Tata the lenders reaction is good for the long-term prospects of India’s loan market.
The reasons behind lenders’ angst is clear. For one, the outlook for the steel sector in India and Europe, two regions which are key revenue generators for Tata, is not very positive. So it is only sensible for banks to want a price that offers them more comfort given the uncertainty.
Moreover, for a loan of $1.5bn, which is the amount the company is seeking to reprice, a general syndication would be needed. To keep retail lenders on board, pricing will have to be attractive enough to compensate for the associated risks.
China’s recent devaluation of the renminbi is also causing some worries. Competition in steel exports is expected to intensify, which does not bode well for Indian steelmakers. So if Tata does end up falling victim to the sector’s troubles, the lending syndicate too will face the brunt.
The relationship driven loan market has always been considered dependable and accommodating and loan market participants are known to take a longer term view on credits, and are not usually perturbed by short term developments that rattle their peers in other asset classes.
But what Tata’s predicament has shown is that no name or relationship is immune in the face of a deteriorating macroeconomic climate. By fighting back against unreasonable price cuts, lenders are finally coming to terms with the fact that the ball is not entirely in the borrower’s court anymore and that they need to step up and right any wrongs they might see.
Sure, no one can blame Tata for trying, especially as India’s loan market this year has been dominated by opportunistic borrowers looking for any window to either refinance quickly — and cheaply — or reprice recently completed transactions.
But by taking a steely resolve against Tata’s plans for a steep price cut, lenders are making a stand against constantly dwindling loan pricing in India. It’s time borrowers take notice.