- More than $5 billion of U.S. dollar loans sitting in pipeline
- Average borrowing costs now less than 1% above Libor
Janet Yellen may have unwittingly helped the Indian dollar-loan market rebound from a three-year low.
Less than a week after the Federal Reserve Chair delayed raising U.S. interest rates, billionaire Mukesh Ambani’s Reliance Industries Ltd. hired 16 banks for a $1.5 billion loan and Rural Electrification Corp. also approached lenders. That takes the pipeline of local dollar-denominated loans planned, mandated or in syndication to more than $5 billion, as average margins loiter at less than 1 percent above the London interbank offered rate.
Cheaper sources of funds offshore may come as good news for Prime Minister Narendra Modi, who’s plowing an extra 700 billion rupees ($10.6 billion) into roads, ports and airports this fiscal year. He wants to reverse an investment slowdown in Asia’s third-largest economy, where interest rates are among the region’s highest. Some firms had delayed borrowing plans as they waited for better economic conditions and a potential U.S. rate increase in September.
“Many more companies are likely to raise funds from the dollar loan markets until the Fed’s next meeting in December,” said Ajeet Agarwal, New Delhi-based finance director at Rural Electrification. “Spreads look very attractive now and we expect dollar rates to remain competitive and not rise significantly until the end of December.”
Power supplier Rural Electrification is sounding out banks for a $150 million loan, which could be increased to $300 million, according to people familiar with the matter. It’s already signed a $250 million three-year facility this month with three lenders costing 70 basis points more than Libor.
Reliance Industries, operator of the world’s biggest oil-refinery complex, is borrowing to refinance U.S. currency loans that were signed in 2012, people with knowledge of the subject said. ONGC Videsh Ltd., the overseas arm of India’s largest state-run energy explorer, is also seeking to refinance dollar debt that it signed at 165 basis points above Libor only last year.
Some $13.4 billion of dollar-denominated loans have been issued by Indian companies this year, 23 percent less than in the same period of 2014 and the least since 2012, according to data compiled by Bloomberg. Average margins on deals fell to 89 basis points more than Libor this quarter, the lowest such costs since 2006. The equivalent for 2015 is 188 basis points, which is the lowest annual number in eight years.
Yellen said the U.S. central bank is on track to raise interest rates later this year, even as she acknowledged that economic “surprises” could lead them to change that plan, in a speech Thursday. The Fed held its benchmark federal funds rate at zero to 0.25 percent on Sept. 17.
While India’s central bank cut its benchmark repurchase rate by 75 basis points this year to 7.25 percent, commercial lenders haven’t reduced their rates in the same proportion. State Bank of India, the nation’s biggest lender, has lowered its base rate by 30 basis points to 9.7 percent. The Reserve Bank of India reviews monetary policy on Tuesday.
“Offshore pricing is more competitive for quality Indian borrowers than raising rupee loans,” said Manmohan Singh, Mumbai-based debt capital markets head for India and Southeast Asia at Royal Bank of Scotland Group Plc. “A buildup in the dollar loan pipeline will be based on capital driven by fresh capex, potential refinances or any event-driven activity such as acquisition financing.”
Other companies with dollar loans in syndication include Bharat Petro Resources Ltd., a unit of state refiner Bharat Petroleum Corp., and Bharat Oman Refineries Ltd. Bharat Petro is marketing a $125 million five-year deal at 114 basis points more than Libor, while Bharat Oman is offering a $70 million facility at 113 basis points.
Central bank Governor Raghuram Rajan earlier this year warned Indian companies of exchange-rate risks when borrowing offshore, likening it to “Russian roulette” and urging them to hedge more. The rupee has fallen 4.6 percent this year against the U.S. dollar, around the median move for major Asian currencies in the period.
Firms may be heeding Rajan’s advice. Dollar loan volumes fell this year as borrowers waited for better corporate performance and economic growth signals, according to Prabal Banerjee, Mumbai-based president for finance and strategy at conglomerate Bajaj Group. India’s gross domestic product grew slower than estimated in April-June from a year earlier, rising 7 percent after a 7.5 percent expansion the previous quarter, official data show.
“The investment climate in India is yet to come to its desired level, though there is a conscious effort towards that by authorities,” said Banerjee. Higher infrastructure spending from state-owned companies will be India’s main long-term driver for economic growth and subsequent rise in local firms’ onshore and offshore borrowing, he said.
Modi has created a company to court sovereign wealth funds and other rich investors to meet his goal of spending $1 trillion on roads and ports over five years. For now, bankers are staying optimistic on dollars.
“The Fed’s action of keeping U.S. rates unchanged doesn’t change the appetite for new loans,” said Parthasarathi Mukherjee, Mumbai-based group executive for corporate relationships and international business at Axis Bank, the fourth-biggest arranger for dollar loans in 2015. “Offshore borrowing will pick up and should climb further by the end of this year.”