Near-term benefits of ECB funding is offset by rupee depreciation

Infrastructure companies avail the ECB funding route to avail lower interest rates than those available in the market

India Ratings & Research (Ind-Ra), a part of global credit rating agency Fitch, said that  the depreciating rupee has brought down the benefit of external commercial borrowing (ECB) for infrastructure projects.

"While projects may be availing loans at interest rates lower than those charged in the domestic market, their debt service commitments in rupee terms may rise sharply if the rupee depreciates beyond initial expectations. The current depreciation fo the rupee versus the dollar may erase potential saving that were expected while availing the ECB facility, said the agency.

"Since some projects incur varying proportions of capital in foreign currency, the ECB acts as a natural hedging tool for payments to vendors in foreign currency over a fairly long construction period. However, debt servicing remains exposed unless hedged, which is rarely the case," the agency said.

Based on its portfolio of rated projects, Ind-Ra estimates a savings of around 6% to 15% of the total debt service obligations on account of ECB funding. These savings are, however, limited to the initial three to five years of debt amortisation. These envisaged savings are helpful since the ECB funding aids cash flows during the project’s initial ramp up stages. Notwithstanding these savings, the total outflow of an ECB funded facility is likely to be higher than that of a facility funded solely in the domestic currency.

The benefits in the initial years of project stabilisation are expected to come at the expense of higher cash outflows, thanks to the unhedged exposure and heavily back-ended amortisation in the later years of the project life cycle.