Reluctant lenders hinder Foreign debt option
Large companies may be tempted to borrow abroad to cut their borrowing costs, which could go up once banks come up with new base rates by April, say finance managers.
A fully-hedged overseas loan could be cheaper by 200 basis points than a rupee loan. But, not many banks are willing to lend large sums of money, say $1 billion, as the loan syndication market is yet to pick up.
Last week, the Reserve Bank of India asked banks to create a ‘base rate’, which will replace the prime lending rate (PLR), the benchmark used till now by banks. The base rate will be the new floor price, and will be computed on a cost-plus basis by each bank.
Large companies, who have been borrowing at sub-PLR rates, won’t be able to do so any more, as the base rate will be the new floor price. As a result, borrowing costs could go up marginally for large companies, though they may still get the best rates.
CFOs like Ravi Sud of Hero Honda say large companies may be tempted to borrow abroad to cut costs. Subba Rao, CFO, GMR Group, said borrowing overseas could be cheaper for many companies, but there could be other constraints. ‘‘Assuming ECB (external commercial borrowing) constraints are taken care, currency hedging costs, depending on the tenure, will have to factored in to work out the overall cost. If a company decides not to hedge currency exposure, which has attendant risks, ECBs will be cheaper,’’ he said.
Indeed, ECBs could be cheaper even if companies cover their interest and currency risks, which they would like to cover as Libor is likely to move up. Libor is the London Inter-Bank Offered Rate, a benchmark for borrowing in overseas markets. If you add a spread of 200 basis points to Libor (0.5 per cent), it adds to 2.5 per cent (RBI had said companies could pay a maximum spread of two per cent on Libor for an ECB of up to three-year tenure, and 5 per cent on loans of more than three years).
Companies would like to convert the floating loan to a fixed rate through an interest rate swap, which could cost 2.8-3 per cent for a five-year loan. Similarly, companies would like to cover currency risks by taking a principal-only swap, which would cover the dollar-rupee movement for the life of the loan. This cover would cost another 2.5-3 per cent.
Even after covering the interest risk and currency risks, a five-year ECB would cost a company 8.5-9 per cent as against five-year rupee loans available at 10-11 per cent, said Subramanian Sharma, director, Greenback Forex Services. But, there’s a problem. There are not many foreign banks willing to lend today. ‘‘Money is not available in large amounts (say $1 billion). Foreign banks are still trying to reduce their balance-sheets, and are not in the market to lend,’’ said Seshagiri Rao, CFO, JSW Steel.
It is possible for companies to raise smaller amounts of $50-100 million (Rs 250-500 crore), which provides a window for small and mid-sized companies who don’t have large requirements of funds. Besides other ECB constraints, companies may find it difficult to borrow loans of less than five-year tenure.
There’s still window available at home. The RBI circular on base rate does not cover commercial paper, and companies say if they raise money through commercial paper, banks can still invest in these, below the base rate. They would hope the central bank doesn’t issue a clarification to close this window.
Bankers say the base rate is a new concept but it will be competitive. ‘‘With excess liquidity, the rates had reached absurdly low, where some mutual funds were lending with no spreads or at the same rate at which RBI lends. That phase is over. Over time, the system will adjust itself to stay competitive,’’ said the head of a private bank.
He cites the example of home loans, for instance, where the credit spreads are the same as those on borrowings by AAA-rated companies. ‘‘The financial system will adjust to a low-risk premium,’’ he said. Bankers are not unduly worried about companies rushing to raise money abroad. They point to the recent fund-raising by Tata Motors, where it refinanced nearly $2 billion overseas debt with onshore debt.
Prabal Banerji, CFO, Hinduja Group, feels borrowing abroad would be difficult for, say, infrastructure companies where capital requirement is for the long term because no overseas lender will agree to lend for such a tenure. And, even if they agree, the cost will be so prohibitive that they will breach RBI’s caps on spreads over Libor.