First Dim Sum by Non-Bank Borrower Slashes Costs

IL&FS Transportation Networks Ltd. (ILFT) may pare borrowing costs by 40 percent selling the first Dim Sum bond from a non-financial Indian company as yields on rupee debt fail to mirror this week’s cut in interest rates.

The toll-road operator issued the equivalent of about $100 million of three-year notes at 5.75 percent this week to refinance a loan raised for the Chongqing Yuhe expressway in China, according to data compiled by Bloomberg. Yuan-denominated debt sold in Hong Kong pay an average of 4.90 percent, while top-rated three-year rupee bonds of non-bank Indian borrowers yield 9.45 percent. The 1.5 billion rupees ($29 million) of 2014 securities of IL&FS’s parent company yield 9.53 percent, according to price indications compiled by Bloomberg.

Yields on India’s benchmark 10-year government notes are the highest of Asia’s 13 biggest markets, and IL&FS and Power Finance Corp., the nation’s biggest issuer last year, are among companies looking to raise money overseas. While the repurchase rate was unexpectedly lowered half a percentage point this week to 8 percent, Reserve Bank of India Governor Duvvuri Subbarao has indicated costs may need to rise to tame prices.

“The company probably came to the Dim Sum market because of the lower borrowing costs as India’s yields are high due to inflation,” James Su, who oversees two Dim Sum bond funds of $40 million at SinoPac Asset Management (Asia) Ltd. in Hong Kong, said in a phone interview yesterday. “Dim Sum bonds can also get them exposure to new groups of investors.”

Cheaper Funding

Part of the funds raised will be used to refinance a loan that IL&FS Transportation took out to acquire 49 percent of the Chinese project, Samuel said. The four-lane 58.7 kilometer (36.5 miles) highway in Chongqing cost 3.5 billion yuan ($555 million), according to the bond prospectus. The Indian company funded the acquisition through offshore borrowings of about $140 million, the document showed.

“It’s a developing market for one, and it’s at times cheaper than other markets,” Danny Samuel, head of structured finance at IL&FS, said by phone yesterday from Mumbai.

The notes may be ranked BBB-, the lowest investment grade, Fitch Ratings said on a statement on April 13.

Alstom SA, the BBB rated French maker of trains and generators, paid a 4.25 percent coupon on its yuan bonds last month. The yield has since fallen to 4.06 percent, according to SinoPac Securities Asia Ltd.

China is encouraging sales of Dim Sum bonds in its push to make the yuan a global funding tool. Chinese and Hong Kong companies have sold more than 80 percent of Dim Sum bonds to date, quadrupling issuance to 151 billion yuan in 2011.

Average Dim Sum bond yields have fallen from 5.53 percent at the start of the year, according to Bank of America Merrill Lynch indexes.

Lotte, Caterpillar

Global companies are increasing issuance of such securities, with Lotte Shopping Co., America Movil SAB de CV and Caterpillar Inc. leading 57 billion yuan of sales this year. Foreign issuers may sell as much as 50 percent of the bonds in 2012, Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole SA in Hong Kong said by phone yesterday.

“IL&FS is following in the footsteps of other foreign companies that have been selling Dim Sum bonds recently,” Kowalczyk said. “It broadens the pool of issuers and by doing so makes the market more attractive.”

IDBI Bank Ltd. was the first Indian issuer to sell Dim Sum bonds, raising 650 million yuan in November offering 4.5 percent notes due 2014. ICICI Bank Ltd., the country’s second-biggest lender, issued 210 million yuan of 4.625 percent notes maturing in 2015 last month.

Rupee Yields

IL&FS Transportation’s parent company, Infrastructure Leasing & Financial Service Ltd., provides financing for road and power projects.

Elsewhere in the markets, the yield on India’s benchmark 8.79 percent sovereign notes due November 2021 climbed three basis points to 8.45 percent today. The rupee advanced 0.3 percent to 52.0125 per dollar.

The extra yield on India’s 10-year notes over similar-dated U.S. Treasuries widened to 643 basis points from a seven-month low of 601 reached on March 14, according to data compiled by Bloomberg. One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, added one basis point to 7.92 percent, data compiled by Bloomberg show.

Bond Risk

The cost of protecting the debt of State Bank of India, seen as a proxy for the sovereign, against non-payment climbed in the past month. Five-year credit-default swaps on the lender rose 37 basis points to 340, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in privately negotiated markets. The swaps pay face value in exchange for the underlying debt should a company fail to adhere to its agreements.

Three-year notes of non-financial companies rated AAA by Crisil Ltd., the Indian unit of Standard & Poor’s, fell seven basis points to 9.44 percent on April 17, after the rate cut.

IL&FS’s interest and finance charges have more than doubled over the past three years, rising from 1.74 billion rupees for the financial year ended March 2009 to 4.98 billion rupees for the year ending March 2011, the bond’s marketing materials show. The company had 93.9 billion rupees of borrowings as of Dec. 31, the circular shows.

Deutsche Bank AG, Royal Bank of Scotland Group Plc and UBS AG are managing the sale for Mumbai-based IL&FS, according to a stock exchange filing on April 13. Export-Import Bank of India, a policy lender wholly-owned by the Indian government, will guarantee up to $114 million in connection to the sale.

Inflation Pressures

Power Finance, the biggest issuer last year, is considering selling its first bonds overseas since 1999 “supposing international markets offer cheaper rates,” Chairman Satnam Singh said in an interview April 16.

Subbarao lowered the benchmark rate to support economic growth, which was 6.1 percent in the three months to December, the slowest pace in more than two years. The central bank Governor said in an interview with Bloomberg UTV April 18 that the chances of a further lowering of rates are small. “The probability of a hike will depend on inflation and demand pressures resurging,” he said.

“Investors are going to sell assets of those countries that are not aiming to reduce inflation, which is not the case in India,” Tadashi Tsukaguchi, a senior fund manager at Mizuho Securities Co. which manages more than $100 million in Tokyo, said in a phone interview yesterday. “There is chance U.S. growth will remain moderate in the near term and therefore we believe companies like IL&FS have made choice of Dim Sum over the dollar.”

To contact the reporters on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net; Rachel Evans in Hong Kong at revans43@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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