PSUs' foreign bond trip feasible but has cost risk

Bankers and analysts say interest rates in international markets have already hardened

At a time when the government is working overtime to make the rupee stable, an idea is doing the rounds to nudge public sector units (PSUs) to raise money through foreign markets to bring in dollars. While the idea is feasible, it might not be practically easy to use this route, due to issues surrounding hedging costs and usage.

According to analysts, SAIL, Engineers India, NHPC, Power Finance, Power Grid, NTPC, NMDC and Power Finance are capable for tapping the international funds, given their needs of funds and financial strength. Flagging the risks associated with such a step, bankers said it could hit the balance sheets of PSUs. They pointed out that the interest rates in international markets have already hardened. Plus, the charges for covering foreign exchange exposure have shot up after rupee lost substantial value.

Senior treasury executives at foreign banks said the forward premium to hedge risk for one year is ruling at eight per cent. Even if the structured arrangement is done for five-year cover, it would cost about 6.5 per cent, they added.  Revati Kasture, head of research wing of CARE Ltd, said it might be a costly affair. It could bring dollars for the country and stop slide. The all in cost (interest rate plus hedging charges) would put pressure on balance sheet. Bankers point out that to entice investors for any bond offering or overseas loan, PSU units have to explain the purpose of raising money, which has to be for a project or to retire domestic loan. Many of these companies are considered to be utilities and have consistent cash flows as well as the ability to service debt. This is important because then only can the advantage of interest rate differential be used in favour of the company.

Also, the market believes that the appetite for good PSUs could be high in the international market. J Akilan, chief representative (India) for BBVA, a global finance and banking group, said there is market for the paper issued by Indian public sector firms. This has to be considered with cost implications, though. However, it might not be practically easy to raise money.

“The biggest risk is, how are these companies going to manage the forex risk? On top of that, there are hardly any PSUs which have natural hedge in terms of having exposure to the international markets,” said Vivek Mahajan, head of research at Aditya Birla Money. In fact, many of them such as oil and gas and engineering companies, particularly in the defence space, have import obligations. If they raise foreign funds, their foreign liabilities will only increase. Second, experts believe that currently, many PSUs might not have the need for funds.