India's financial markets have had a tough year. Economic growth has slowed, consumption is yet to see a pick-up, and liquidity onshore is thin due to the turbulence facing non-banking financial companies (NBFCs). Political stability due to prime minister Narendra Modi winning his second term is comforting, but the slow pace of reforms has posed some challenges.
Against that backdrop, firms looking for funding have been forced to head offshore given poor conditions in the domestic market.
Some of them have found success despite the noise. For example, Fullerton India Credit Co closed its $250m-equivalent three year facility in October month, with the three lead banks bringing in 14 participants during syndication. More recently, private equity firm Blackstone’s $166.3m loan to support its Essel Propack acquisition was wrapped up with 16 banks on board.
Others were less lucky. Shriram Transport Finance Corp, an NBFC, failed to attract any lenders in syndication for its $350m facility at the end of last year, even after bumping up the margin from 140bp over Libor to 190bp. Bankers away from Tata Capital Housing Finance’s $75m facility said the deal received little response in the market.
This does not bode well for the numerous Indian companies planning offshore loans. But it does provide some insight into the kinds of deals that work and the ones that don’t — which potential borrowers should look at closely.
The successes of Fullerton India and Essel Propack were either thanks to strong parentage or the nature of their businesses. Fullerton India is a wholly-owned subsidiary of Fullerton Financial Holdings, which in turn is owned by Temasek, Singapore’s sovereign wealth fund. The strong sponsor gave many lenders some comfort.
In the case of Essel Propack, the tube packaging firm is targeting clients in countries including the US, Mexico and Colombia. With its revenues in dollars, the company does not need to hedge its borrowing, and will be less affected by any rupee depreciation — also a win from lenders’ perspective.
What will pose a roadblock to potential borrowers is a much stricter client selection process among banks.
Many lenders are cautious about Indian credits, with the NBFC crisis, triggered by a high-profile default last year, being one of the main concerns. Ratings agency S&P wrote in a report in October that there is a rising risk of contagion in the Indian financial sector as many finance companies have lost more than half of their equity value in the past year. Additionally, a contagion analysis from the Reserve Bank of India suggested that the failure of any top-five housing financial corporates or NBFCs will result in the default of up to two banks.
That is worrying. Added to that are rising concerns around India’s growth. The country’s GDP growth stood at 5% in the April to June quarter, a six-year low since the fourth quarter of the 2013 fiscal year. The International Monetary Fund cut the country’s GDP growth rate projection to 6.1% in October from 7% in July.
This has naturally made loans bankers stricter when it comes to client selection. Some senior syndication bankers told GlobalCapital Asia that they are more comfortable lending to companies that have strong parentage, including state-owned names and subsidiaries of large conglomerates. Others have a preference for companies in the technology sector, as they typically have lower debt and the ability to generate enough cash for their working capital, making them less affected by the NBFC crisis.
In addition, if more NBFCs default next year or the economy stagnates further, banks are likely to continue to step away from Indian deals, fearing that defaults at NBFCs will have a domino effect on companies in other sectors as well, they said.
Indian borrowers are in for a tough time as banks become pickier about the kinds of firms they will lend to.
The high quality credits will, of course, find support from their relationship banks, but companies lower down the rung could very well struggle. While they should certainly hope for the best, they should be prepared for the worst.