Indian borrowers have dominated the loan market over the last year. Financial institutions and corporates shunned domestic financing in favour of dollars, prompting a swathe of offshore loans to finance acquisitions, working capital and capital expenditure.
The reason was simple: rupee funding simply got too expensive. The Central Bank of India increased interest rates in March to dampen inflation but it also dampened the domestic loan market by increasing the cost of funding at home. Dollar loans are a more economic source of funding, even after a swap into rupees.
Some 12 Indian banks signed dollar-denominated deals in the past 12 months, alongside four public finance institutions and several large deals from Indian corporates. Bankers expect the wave of international finance to continue this year as at least 14 corporate loans that were agreed in 2006 mature in 2011, as will several three year bank loans agreed in 2008.
But borrowers may find lenders increasingly selective about their commitments. Banks are reaching their country limits and, strong relationships or not, may have to start saying no to Indian borrowers.
Banking on Taiwan
International banks have rushed to secure bookrunner mandates on loans to Indias banks, despite the quite small size of deals and limited rewards. Union Bank of India, for example, attracted five international bookrunners to its $175m deal in September, while Bank of India had seven banks at the top level for its $220m deal in November.
But Taiwanese banks were the big source of liquidity for Indian banks in 2010. "Taiwan has an overbanked domestic market with very low pricing on domestic deals," says Phil Lipton, head of syndicated finance at HSBC. "These institutions try to increase their overall yield and diversify their portfolio by looking internationally for assets."
Indian banks tick the right boxes. Many, such as Bank of India, are nationalised and have implicit government guarantees, improving the quality of their credit. And the short tenor of most of these loans three years provides attractive pricing for limited risk.
Bank of Baroda was one of the first to benefit in 2010. It attracted eight Taiwanese banks to a $175m three year loan in February, heralding Taiwanese demand for these deals that continued throughout the year. Six Taiwanese banks joined Punjab National Banks $150m loan in July, and seven committed to IDBI Banks $125m loan in November.
Indian corporates have competed with the banks for dollar funds this year. Reliance Industries raised four dollar loans in 2010, with international names committing the bulk of the facilities. The company first tapped the market in March, raising a total of $800m from two club loans and 11 non-Indian banks. The company returned in August for a further $1bn from 14 international bookrunners and a syndicate of 17 non-Indian banks. The borrower was back in the market with a $1.5bn loan at the end of the year for subsidiary Infotel Broadband Services.
Bharti Airtel was another borrower that banks fell over themselves to please at first. Bhartis takeover of Zains African business was a rare outbound acquisition from India. Banks clamoured to get involved and Bharti made the most of its popularity, signing up 13 banks to underwrite the $7.5bn loan. But tight pricing limited the deals success in syndication only five banks came in, and four joined on tickets of $50m or less leaving the top level banks with large holds. Bharti then agreed to repay part of the $7.5bn early to take the leads down to their agreed holds and soften the impact of the failed syndication.
Too many borrowers
But by the end of the year there were signs that lenders could be running out of room for Indian banks and corporates. Mid-cap company BKT Tires was still struggling to attract commitments in December, after more than a month in syndication, though three banks did eventually come in. Canara Bank decided to push its deadline for commitments to a $175m loan into 2011 in the hope that a new year would bring new liquidity. "Theres always a point when you get near to the end of the year and you want to delay launch to hit next years envelope," says Didier Leblanc, head of loan syndication for Asia Pacific at BNP Paribas."But with the number of borrowers needing to refinance or repay dollar deals in 2011, lenders may need to rethink their country allocations. As Atul Sodhi of Crédit Agricole says: "India is a compelling story. Not many people can say no to higher country limits when the economy is growing so fast. Banks that have restrictive limits will have to sort themselves out."