The ever lower pricing being secured by state owned Indian entities has dominated bankers’ discussions lately. Of the proposals sent out by these public issuers, at least two have been awarded to the Japanese megabanks, which, leveraging their low cost of funding, have bid all-in pricing of as low as 100bp in one instance.
These state owned firms enjoyed plenty of bidding interest from a variety of international lenders last year, but that interest seems to have diminished in the face of lower returns. Marquee company Indian Oil (IOC) saw a stellar response for a $650m loan closed in June 2014 and which offered a margin of 150bp.
Contrast this with IOC’s latest facility, a C$600m ($541m) loan that is currently in a North America targeted syndication, and which pays a margin of just 105bp. That thinning of pricing has come amid positive sentiment towards India that has persisted since May, after the election of prime minister Narendra Modi, who brought with him a corporate-friendly image.
The dominance of the Japanese megabanks and the smaller returns available on state owned deals have left a gap for banks wanting to book Indian assets while also earning a decent return. This is where Indian corporates that are lower down the credit curve or that do not enjoy deep and wide overseas banking relationships can step in.
“The market that was not available to these guys a year ago is now available,” said a Singapore based syndicate banker who looks at South Asia. “Earlier they would have to pay [all-in pricing] over 3%, but now they can get away with paying in the mid to low 200s.”
He cited smaller subsidiaries within the Tata Group as the kind of credits that could benefit from current market conditions.
With monetary loosening across the globe and a flood of liquidity in Asia, most banks are grappling with the question of how to grow profitably. “We banks have to be creative,” said a Hong Kong based banker whose employer is active in Indian deals. “[By creative] I mean go lower down the credit curve, invest in companies that are more leveraged.”
He cited the example of a loan currently in the market for speculative grade Indian paper company Ballarpur Industries. Upstream oil and gas company Tata Petrodyne is also expected to come offshore for funding at some point this year.
Ballarpur, or Bilt Paper, raised a $74.48m loan in 2013, according to Dealogic. Crédit Agricole and Rabobank led the deal, which matures in July 2015. Meanwhile, Tata’s Petrodyne signed a $60m five year term loan with two banks in 2013. Australia and New Zealand Bank was the bookrunner, according to Dealogic.
Companies in infrastructure sectors like cement are likely to hit the market for both capital expenditure and refinancing this year, said bankers. This comes amid anticipation that the Indian government is likely to announce higher infrastructure spending in its budget for Indian financial year 2016.
Dollar revenues
Companies that earn their revenue in dollars naturally lend themselves to offshore borrowings, said bankers. India’s Essar Oil is in the market with an advanced payment based loan of $180m. Bankers close to the transaction said it was raising the money to refinance rupee debt, as converting rupee debt to dollars makes sense for the borrower, which has most of its export revenue in dollars.
Another company in the market with an offshore borrowing is Indian frozen meat exporter MKR. The company is said to be looking for a $100m six year tenor loan, with the deal led by Citi.
A banker at an international lender was sceptical about the robustness of Essar Oil’s credit, but said other export companies, such as those in the Indian information technology sector, should take advantage of the abundant liquidity available in international markets to form banking relationships.
“Any company with dollar revenues should look overseas,” he said. However he noted that companies in the IT services sector tended to be very cash rich, thanks to revenues in dollars and expenses in rupees, so they did not generally need to seek funds offshore.
Are companies willing?
While there is greater risk in lending to non-state backed names, the Hong Kong based banker was confident that Taiwanese banks would be willing to lend to riskier credits than they typically would, including lending to Essar Oil.
“They need to meet a threshold for yields, because of their higher internal cost. They are looking outside China so they will be a good source of retail liquidity.”
Indian banks are also eager to anchor growth-related overseas funding for corporates in their home market, said a banker at one of the top five Indian lenders. After effectively being barred from offshore refinancingsby the Reserve Bank of India, these banks are looking to fund financings for other purposes.
“The three big Indian banks can step in and underwrite for most Indian corporates,” he said. “We can easily lead deals but it depends on borrowers [seeking overseas funding] ultimately.”
While banks’ willingness to fund these companies is evident, Indian corporates’ reluctance to tap overseas markets remains an issue, said the Hong Kong based banker.
“All ECBs [external commercial borrowings] need to be hedged anyway,” he said, adding that with a recent rate cut at home, corporates may give offshore a miss and tie up financing domestically instead.
A second banker at an Indian lender said that unless there was an imminent need for dollar funding these companies would probably stay home.
“Indian banks are facing NPAs [non-performing assets], but give it some time,” he said. “It’s not about willingness to come offshore but about their belief in their ability to meet those [offshore] debt obligations. Once corporates in India start gaining confidence about that you will see them coming offshore.”
Having a diverse set of lenders will help these companies when the current tide of liquidity wears away, so these companies would do well to come offshore now, while the going is good, said the Hong Kong based banker.