Cheaper rates, new investor profiles, tax efficiencies and international operations see India Inc making a beeline for overseas bonds.
It was a favourite of Mint Road. But it’s not about banks any more. The lure of cheap money in overseas markets has caught the attention of India Inc. Finance heads from across boardrooms — from the bluest of chips to even public sector companies — are calling up bankers, exploring fundraising opportunities through sale of foreign currency bonds. For any company with a sizeable overseas presence, the bond markets in the US, Europe and Japan are still the only pockets of some euphoria in this season of sobriety.
The reasons vary. For some like Tata Motors-Jaguar Land Rover, or even Bharti, it is about raising money to refinance short-term, high-cost debt. For some like Tata Power, it is also to bankroll capex. From the Tatas to Vedanta, from Bharti to Rural Electrification Corporation (REC), bonding with overseas investors is fast becoming strategic.
So far, according to data from Dealogic, non-financial Indian companies have raised $5.4 billion in sub-investment grade-bond issuances alone, compared with $7.1 billion for the whole of 2010 calendar year, with some like Tata Motors-Jaguar Land Rover and Vedanta even raising over a billion dollars each. Joining them in such bulge bracket fundraising have been banks like ICICI Bank.
“For any fundraising programme, level of interest rates is a key variable. Rates in India have gone up sharply, compared to the overseas markets. There is also a demand for high-quality Indian paper,” Munish R Varma, managing director and head of global markets of Deutsche Bank in India, said.
The Reserve Bank of India (RBI) has raised rates as many as 10 times in the last 15 months to anchor inflationary expectations in the domestic economy. Interest rates in developed economies around the world continue to remain soft due to uncertainty in the global macroeconomic environment.
According to bankers, companies can save at least 100-200 basis points on the interest cost if they raise funds through foreign currency bonds instead of a local issue. The difference in interest cost is likely to persist in the short to medium term, as RBI is expected to continue with its rate increase actions to tame inflation, which remains at elevated levels.(Click here for graph)
“Overseas fundraising will also depend on international liquidity. Companies reaching threshold of their rupee loan exposures with the banking system could also look at overseas bond issuance to diversify investor base,” Manmohan Singh, managing director and head of debt capital markets of Royal Bank of Scotland (RBS) in India, said.
Most companies with projects on the ground agree that raising debt overseas for global operations is easier and more tax efficient. A whole new set of investors — high networth individuals, asset managers and other institutions are lapping up good Indian corporate paper.
For example, mining giant Vedanta Resource’s bigger-than-expected $1.65-billion offering last month was marketed through the ‘144a’ market in the US, which allows companies to place securities with a wider pool of professional investors or “qualified institutional buyers”. Investment bankers say, Rule 144a placings offer access to a more liquid market without all the constraints of a publicly-marketed transaction.
“The corporate bond market overseas is matured as compared to India and ratings do not play a big role in deciding the success of an issue,” said V Ashok, chief financial officer of Essar Group, adding that availability of cheaper capital overseas was an equally strategic factor.
The street is abuzz with the talk of Essar Steel planning to revive its $900-million bond issue – aborted last year – and its IT and BPO wing Aegis soon launching a $250-$300-million issue. Similarly, India’s largest mobile phone operator by subscriber base, Bharti Airtel, has asked banks to coordinate an overseas bond of up to $1 billion to settle its African debt obligation.
Public sector undertakings have also bit the overseas bond bullet. At least three public sector companies — REC, NTPC and Indian Oil Corporation (IOC) — are believed to have drawn up similar plans for overseas bond issues. They planned to mop up around $1.5 billion in total, each raising around $500-750 million, said bankers who were assisting these PSUs to raise funds.
“We want to raise $1.5 billion in the overseas market this year via bonds and ECBs. We have already sought the approval to raise $750 million right now,” said H D Khunteta, director of finance at REC.
Interestingly, vanilla is not the only flavour one would now typically opt for. The structuring of these bonds is also getting bolder. In April, for example, Tata Power gave its perpetual bond a twist. Its Indonesian arm, Bhira Investments, launched a hybrid, offering a 60-year tenure and an 8.5 per cent coupon rate. The 300-million-dollar book received a demand of 3.5 billion dollars, prompting the company to raise the issue size by 50 per cent.
These hybrids lie somewhere between a perpetual bond and a vanilla debt issue. While the tenure of domestic debt ranges from 5-7 years, the tenure of external commercial borrowings (ECB) can go up to 10 years, a perpetual bond doesn’t have a defined maturity. With a more than 10-year maturity, the hybrid takes the middle path. Equally important, these debt instruments also carry equity-like features, making them more attractive.
“One can get 100 per cent equity ratings. Plus, there are tax efficiencies and the rate arbitrage. It’s a good thing that these instruments are available in the market today,” explains Tata Sons Director (Finance) Ishaat Hussain.
Dollar appears to be the preferred currency for Indian companies for overseas bond issuances, even though yen or swiss francs have also seen limited traction. “While US dollar remains the currency of choice for most issuers, given its depth and pricing efficiency, we have recently helped companies like JLR access the GBP (pound) markets as well,” mentioned Rajiv Nayar, managing director and head of capital markets origination of Citi India. Nayar feels the decision on alternative currencies is driven either by the final call in cost after swapping back to US dollar or “alternatively by matching the currency of their underlying cash flow with currency of their debt obligations.”
But it is not a cake walk when it comes to repatriation of capital. Money raised abroad through bonds, if brought back to India, attracts a withholding tax of 20 per cent. So, for funding requirements in India, ECBs still are preferred instruments, despite the strict end-usage norms.
Not every company has a global scale or reputation. This has allowed domestic banks to line up their own overseas bonds to raise money for such Indian companies.
“Overseas bond markets are not accessible to all Indian companies. Also, pricing and costs can be quite steep for non-investment grade issuers from India as global investors do not have deep knowledge of most Indian companies,” said Hitendra Dave, MD and head of global markets at HSBC India.
“(Funding) requirements for most mid-sized companies are not more than $100-150 million. For such companies, funding through Indian banks will remain the most cost-effective source of funds,” he said.
In May, India’s largest private sector lender, ICICI Bank, raised $1 billion through dollar bonds with maturity of 5.5 years and carrying a coupon of 4.75 per cent. The country’s largest commercial bank, State Bank of India, had also raised 375 million Swiss Francs (around Rs 1,500 crore) through an overseas bond issue in February.
Bankers dismissed fears that the sovereign debt crisis in Europe, which had spooked the bond markets, would impact overseas bond issues of Indian companies. Instead, they expect overseas bond issuances to gather momentum with an increase in the number of Indian companies setting up global offices.