Cloudy outlook for 15 financial institutions, top 3 IT companies

India Inc turns to local bond mkt amid costlier foreign funds

The scramble to raise funds from the local bond market is set to intensify after Standard & Poor’s changed its outlook on India’s sovereign rating.

The rating agency’s move is likely to make foreign borrowing expensive for India Inc. That, coupled with easing interest rates in the domestic market, will make local fund-raising more attractive, industry leaders and bankers feel.

“It will affect the international lending rates for India and the cost of borrowing from abroad would get rise... The international funding for external commercial borrowings and foreign currency convertible bonds will also be affected,” said Abhishek Goenka, founder and chief executive of India Forex Advisors.

The rush is already visible, with Indian companies raising close to Rs 6,000 crore after the Reserve Bank of India (RBI) cut the repo rate by 50 basis points last week.

For instance, aluminum maker Hindalco Industries has raised Rs 3,000 crore by selling secured non-convertible debentures. The 10-year paper carries a coupon rate of 9.55 per cent. The issue, the largest by an Indian manufacturing company in recent years, was managed jointly by HDFC Bank and Standard Chartered Bank.

“The deceleration of the Indian economy will bring down the interest rates. Hence, the rally in bond markets is inevitable. Hindalco's issue has set a new benchmark in pricing and many more companies are interested in raising funds from the local bond market,” Rakesh Singh, head of investment banking at HDFC Bank, told Business Standard.

Tata Steel also raised Rs 1,500 crore through a similar issue. The bonds were priced at 9.80 per cent. Industry sources said companies such as Indian Hotels, Tata Motors and IDFC were in the process of raising funds by selling rupee-denominated bonds.

S&P revised its rating outlook to ‘negative’ for 15 Indian financial institutions, the top three information technology companies in the country, and three more domestic companies.

“This will impact foreign borrowings... As the outlook changes, the cost of borrowing in the foreign markets will also go up,” noted V Balakrishnan, chief financial officer of Infosys, the second largest software exporter in the country.

The view was echoed by a senior executive of a Mumbai-based manufacturing company. “Only those companies that enjoy a superior rating than the Indian sovereign will find some acceptance among international investors. But the number of such companies is low. Hence, many institutions will now look at the Indian bond market to meet their funding needs,” the official said.

However, a section of the market feels heavy government borrowing may crowd out private fund-raising programmes in the current tight liquidity environment. "There will definitely be a rush but the Indian corporate bond market does not have too much depth. The bond issuances of Tata Steel and Hindalco, coupled with the government's robust borrowing plan, may make the market dense. Hence, those who hit the market early will enjoy a better rate," said a banker.

 

Additional reporting by Shivani Shinde