Billionaire Gautam Adani’s energy producer and India’s state-run rail operator are making this year the nation’s busiest for foreign-currency borrowing since 2007 as rupee funding costs rise.
Companies from Adani Power Ltd. to Indian Railways Finance Corp. have won approval from regulators to raise $14.3 billion through syndicated loans in the first seven months, compared with $7.6 billion in all of 2009, central bank data show.
The difference between India’s benchmark lending rate and the six-month London Interbank Offered Rate has widened to a two-year high of 5.26 percentage points as policy makers try to curb Asia’s second-highest rate of inflation. Companies need funds to expand in an economy that the International Monetary Fund predicts will grow 9.4 percent this year, almost four times faster than advanced economies.
“It is getting increasingly attractive to go abroad and borrow,” Ameet Desai, chief financial officer at Ahmedabad-based Adani Power, said in a Sept. 8 telephone interview. “While local rates have risen quite a bit, international rates are still low, giving a good arbitrage opportunity for companies.”
Reliance Industries Ltd., India’s largest company by market value, borrowed $500 million in five-year term loans at 2.23 percent late last month. State Bank of India, the nation’s biggest lender, charges its highest-rated customer 7.5 percent for a rupee loan.
ICICI, Yes Sales
Elsewhere in India’s credit markets, ICICI Bank Ltd., the nation’s second-largest lender, plans to sell bonds, Mumbai- based Yes Bank Ltd. sold debt due in 115 months and the central bank will review how it administers monetary policy.
ICICI approached banks to sell 7 billion rupees ($151 million) of 10-year bonds, said three people familiar with the matter who declined to be identified because they weren’t authorized to speak publicly. The bank said July 31 that its first-quarter net income rose 17 percent to 10.3 billion rupees, or 9.16 rupees a share, in the three months ended June 30, from 8.78 billion rupees, or 7.87 rupees a share, a year earlier.
Yes Bank issued 3 billion rupees of 9.3 percent bonds maturing in 115 months, according to Surendra Jalan, president of Indian financial institutions. AK Capital Services Ltd., Trust Capital Services Ltd. and Real Growth Securities helped arrange the sale. The money raised will be used to boost the bank’s lower “Tier 2” capital, Jalan said in a phone interview from Mumbai.
Central Bank Review
India’s central bank said late yesterday on its website that it set up a panel headed by Executive Director Deepak Mohanty to review the difference between the repurchase and reverse-repurchase rates and the frequency and timing of auctions, and assess the role of the bank rate.
“The RBI may be doing a reality check on the effectiveness of policy as India’s markets and economy have undergone a lot of change in the past decade,” said Bekxy Kuriakose, who manages the equivalent of $440 million in Indian debt at L&T Investment Management Ltd. in Mumbai. “Certain policy instruments may have lost their relevance while some others probably aren’t used often enough.”
The Reserve Bank of India has raised the repurchase auction rate, the benchmark for borrowing costs, to 5.75 percent from 4.75 percent in the past six months. India’s wholesale-price inflation has averaged 10.5 percent since the start of the year, the most in Asia excluding Pakistan.
The amount of loan approvals by the central bank this year is the most since $24.4 billion was raised in all of 2007, according to data compiled by Bloomberg.
Adani Power plans to borrow about $1.5 billion overseas in the next two years including $200 million this month to expand capacity. The company’s chairman, Gautam Adani, was ranked 397th on the 2009 list of Forbes’ richest people in the world with a net worth of $6.4 billion. Indian Railways said last week it aims to borrow $200 million by Dec. 31 to buy coaches.
GAIL India Ltd., the country’s gas distributor, plans to raise a $150 million loan in overseas markets by year-end, Chairman B.C. Tripathi told reporters in New Delhi on Aug. 2.
Standard Chartered Plc, which ranked fifth in India among overseas loan arrangers last year, has climbed to the second spot in 2010 by helping raise $1.14 billion, Bloomberg data show. The U.K. lender, which makes about 75 percent of its profit in Asia, arranged borrowings worth $311 million in all of 2009. HSBC Bank Plc, Europe’s largest, was third and State Bank of India has retained the top position for a fourth year.
“The outlook for foreign-currency borrowings is encouraging because they are cheaper,” Prakash Subramanian K.V., managing director and regional head of capital markets for South Asia at Standard Chartered in Mumbai, said yesterday in an interview. “Our position has improved because of larger deals that have happened in the marketplace as the economy is expanding fast.”
A slide in the cost of protecting the debt of state-run State Bank of India, which some investors perceive as a proxy for the nation, signaled rising confidence in the ability of Indian companies to repay their liabilities. The cost of credit-default swaps on the lender has decreased 45 basis points to 186.5 points from a one-year high reached in May, according to CMA DataVision.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The difference in yield between India’s top-rated three-year corporate bonds and similar-maturity government debt was 81.2 basis points yesterday, Bloomberg data show. The spread has narrowed from 137.2 basis points on Jan. 29, the widest level this year. A basis point is 0.01 percentage point.
Rising interest rates have weighed on government notes. The yield on the benchmark 10-year bond has increased 38 basis points this year to 7.97 percent. The notes have returned 2.8 percent, including reinvested interest, the worst performance among 10 local-currency debt markets in Asia outside Japan, according to indexes compiled by HSBC Holdings.
The cost of fixing rates on money for three years in the market for so-called interest-rate swaps, tumbled 37 basis points in August, the most in 20 months, to 6.57 percent, based on Bloomberg data. The rate was 6.62 percent today, two days before the central bank reviews policy rates. Nomura Holdings Inc., Japan’s biggest brokerage, forecast a rise of 25 basis points, the last increase in the year ending in March.
The rupee has advanced 5.2 percent since 2008, making it cheaper for companies that raise funds in the U.S. currency to repay loans. The rupee has gained 0.4 percent this year to 46.40 per dollar, Bloomberg data show.
Indian Oil Corp., which borrowed $500 million by selling five-year bonds in January, will assess debt requirements later this year, Serangulam V. Narasimhan, director of finance in New Delhi at the nation’s largest state-run refiner, said in a Sept. 7 telephone interview. Borrowers must consider the risk that the rupee falls even though the difference in interest rates between India and overseas debt markets is attractive, he said.
“Even after accounting for hedging, Indian companies can raise funds at least 100 basis points cheaper abroad in the current environment,” he said.