ECBs unlikely to help improve credit ratings: India Ratings

Despite being cheaper, inclusion of an external commercial borrowing (ECB) facility in the funding structure of a project will not automatically improve its overall credit profile, India Ratings has said.

 

The near-zero interest rate of ECBs is the key driving factor for infrastructure projects to lean towards foreign borrowings, it said.

 

"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 domestic currency falls beyond initial expectations," said an India Ratings report.

 

The current fall of the rupee, which lost 6.5% since early May and hit a life-time low of 58.98 to the greenback last Tuesday, is likely to erode the potential savings expected while availing the ECB facility, it said.

 

"Therefore, inclusion of an ECB facility in the funding structure or substitution of the existing domestic debt with an ECB facility will not, automatically, improve the overall credit profile of the project," the report said.

 

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 report said.

 

"Around 6-15% of the total debt service obligations are saved 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 ECB funding helps cash flows during the project's initial ramp up stages," it said.

 

Notwithstanding these savings, the total outflow of an ECB-funded facility is likely to be higher than that of a facility funded solely by rupee loans, India Ratings said.