India Beating China on Growth Cuts Loan Costs to Least Since ’08

  • Offshore syndicated loan volumes have climbed 7% this year
  • Foreign-currency loans are outstripping offshore bond issuance

Indian companies have raised 7 percent more through international syndicated loans this year, amid a turbulent market for global financing, as bankers showed confidence in the world’s fastest-growing major economy.

State-run oil company ONGC Videsh Ltd. and Tata Steel Ltd. have led $11.5 billion of loan fundraising this year by Indian firms, more than four times as much as the $2.4 billion in offshore bond offerings, data compiled by Bloomberg show. Lenders are seeking the lowest premium over benchmark rates to lend to Indian borrowers since 2008 and are charging them less than Chinese counterparts.

“There is significant interest in India given the stability in the economy and a good supply of government-owned entities tapping the market,” said Yogesh Venkatachalam, a director for loan syndication at Australia & New Zealand Banking Group Ltd. in Hong Kong. “A heightened sense of caution regarding China has also driven lenders to consider alternate markets such as India.”

Year-on-year growth in Asia’s third-largest economy accelerated in the first three months of 2016 to 7.9 percent, while in China the pace of expansion slowed for a third consecutive quarter to 6.7 percent. Confidence in Indian Prime Minister Narendra Modi’s plans for deregulation and a new bankruptcy law are also driving interest from foreign bankers, although sentiment took a hit following this month’s announcement by central bank chief Raghuram Rajan that he won’t be sticking around beyond September.

ANZ’s Venkatachalam estimates that Indian businesses could raise as much as $20 billion though overseas loan syndication this year. He expects volumes to be largely driven by companies that need to refinance maturing debt. Firms have to repay $4.8 billion of loans in the remaining part of 2016, $14 billion in 2017 and $13.1 billion in 2018, according to data compiled by Bloomberg.

The average margin paid over benchmark rates on non-rupee loans has been 194 basis points so far this year. That’s the lowest for any January-June period since 2008 and compares with 252 basis points for non-yuan loans to Chinese borrowers.

No Surprise

Companies have to comply with a lot more covenants while taking a loan, but it is cheaper and also gives leeway to borrowers to pay back the debt earlier, according to ONGC Videsh, the largest Indian borrower in the foreign-currency loan market this year.

“It’s no surprise Indian companies are getting better rates,” said Satpal P. Garg, its New Delhi-based finance director. “The entire world is looking at India in terms of growth and feels that India could take the place vacated by China.”

About $5 billion of foreign-currency loans in India are either in early-stage negotiations, are being marketed to banks or have been mandated, data compiled by Bloomberg show.

Slowing Issuance

India’s overseas bond offerings have dropped 63 percent in 2016, after the central bank last year lowered the cap on what issuers can pay to raise money overseas. The new rules state that issuers can’t sell three-to-five-year debt abroad with an all-in cost of more than 300 basis points over the six-month London interbank offered rate. The previous premium limit was 50 basis points higher.

The average spread over sovereign yields on offshore Indian corporate bonds widened to 299 basis points as of June 23 from 261 basis points at the end of June 2015, according to an index of Indian issuers compiled by Bank of America Merrill Lynch. The average margins on non-rupee loans have dropped from 275 basis points in the first half of 2015.

“Companies are choosing loans over bonds as they are cheaper,” said Raymond Chia, head of credit research for Asia excluding Japan at Schroder Investment Management Ltd. in Singapore. “India’s investment-grade rating and overall improvements in macroeconomic fundamentals have also helped companies to lower borrowing costs.”

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