RBI Curbs Skirted as Greenko Innovates to Borrow: India Credit

Banned from selling debt with high coupons overseas, India’s neediest companies are turning to an innovative legal structure to raise the money they need.

Greenko Group Plc, a Hyderabad-based hydro and wind power company rated B by Standard & Poor’s, in July used an offshore entity to sell U.S. dollar notes at a spread higher than the limit established by the Reserve Bank of India’s external commercial borrowing rules. It then sold the same amount of rupee-denominated bonds onshore, and had the offshore unit buy the debt. Now electric energy supplier Mytrah Energy India Ltd. is looking at doing the same thing.

Although it’s relatively difficult to skirt the RBI curbs because companies first need a holding entity abroad, corporates are keen to replenish their coffers as Asia’s third-biggest economy expands at the fastest pace in two years. The government tightened the rules in 1991 after a balance of payments crisis forced it to pledge gold reserves to the International Monetary Fund in exchange for a loan. India was largely spared from the Asian financial crisis six years later.

These new structures are “a smart way of getting around some of the external commercial borrowing caps in terms of interest coupons,” said Mumbai-based Rajesh Simhan, the head of international taxation at law firm Nishith Desai & Associates. “It’s a nice solution.”

RBI Rules

Under the regulations, Indian companies, regardless of their credit score, can’t sell three- to five-year bonds offshore with an all-in cost of more than 350 basis points over the six-month London interbank offered rate. The ceiling is 500 basis points for notes with tenors of more than five years.

Local banks have been reining in lending as bad loans in India rise, helping to push international bond sales up 30 percent this year-to-date, Bloomberg data show. Stronger economic growth has helped the rupee advance 0.9 percent against the dollar this year, while 10-year bond yields have fallen 46 basis points over the period to 8.368 percent today. India’s gross domestic product expanded 5.7 percent from a year earlier in the April-June quarter.

“The cap on maximum pricing for external debt makes it very difficult for high-yield issuers to borrow in international bond markets,” said Avinash Thakur, a managing director of debt capital markets at Barclays Plc in Hong Kong. “The only ones that have been able to borrow are those with offshore funding requirements and now companies with offshore holding companies using the Greenko structure.”

Mytrah Energy

Greenko’s $550 million of 8 percent debentures mature in five years and were sold at an about 631 basis-point premium over similar-maturity Treasuries. The rate compares with the about 12 to 14 percent Greenko pays on its onshore debt, meaning it is cheaper even after adding the costs of hedging foreign-exchange risk, according to Mehul P Sukkawala, a Singapore-based director of corporate and infrastructure ratings at Standard & Poor’s.

“There are economic incentives when you look at the cost of funding offshore versus rates in India,” he said.

Mytrah Energy, also based in Hyderabad, hired Deutsche Bank AG, Investec Ltd. and Standard Chartered Plc to help arrange what would be its first sale of dollar bonds last month, people familiar said. The notes will be guaranteed by Mytrah’s stake in its Singapore and Indian units, according to Moody’s Investors Service. Mytrah is rated B by S&P, five levels below investment grade.

High-Grade Appeal

The proceeds of Greenko’s offshore bonds were used to refinance existing debt at various operating entities, which then sold rupee bonds to the offshore issuer, Greenko Dutch BV, via a private placement, according to Fitch Ratings Ltd. The company got some $1.4 billion of orders and final pricing was about 50 basis points inside initial price thoughts, a person familiar said July 25.

Officials at the central bank didn’t respond to an e-mail seeking comment on the new structures being used by corporates.

Before Greenko’s deal, companies that raised funds offshore typically repatriated the money via equity injections into subsidiaries, Barclays’s Thakur said. The equity cost of capital is higher than debt because interest payments are tax deductible while dividends are not.

Companies with lower ratings are unlikely to sell bonds in India, regardless of the coupon, because local investors tend to buy only high-grade credits, S&P said. “There’s a lot of demand for bonds rated double A and above in India but below that, it gets really shallow,” Sukkawala said. Linking a company’s international debt in some way to its local bonds may make investors feel safer about getting their money back in the event of a default, he said.

Asset Claim

“Some bondholders take comfort that the restricted group of operating subsidiaries that issued the rupee bond can’t take on additional debt,” Sukkawala said, referring to the Greenko transaction. “But we’ve not seen this structure tested yet and investors are still exposed to the risks embedded in the Indian legal system.”

It’s still complicated for offshore bondholders to have a direct claim on assets within India given the regulatory framework, Raja Mukherji, the head of Asia credit research for Pacific Investment Management Co., said. “That needs a lot of work.”

The RBI also forbids Indian issuers from providing guarantees to foreign-currency debt. High-yield bonds in other emerging markets usually come with a guarantee pledge from the most profitable units of the issuing company.

If Mytrah proceeds with a similar-structure dollar bond sale that may pave the way for more, creating a genuine high-yield market in India, according to Moody’s Hong Kong-based senior analyst Mic Kang.

“This could be another source of funding,” he said. “It could be credit positive for India’s infrastructure sector.”

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