Il & Fs Executes Innovative Swap Deal For Tirupur Project

Infrastructure Leasing and Financial Services Limited (IL&FS) has carried out an innovative $ 25 million interest rate swap for the New Tirupur Area Development Project.

IL&FS placed the dollar funds with an overseas branch of the Bank of India and simultaneously drew an equivalent amount in rupees from the banks domestic branch at the prime lending rate. The exchange rate at the time of the swap was Rs 35.66.

The swap was conducted with the purpose of making rupee resources available to the project till it could draw on the dollar funds.

The loan, which has a tenor of 30 years, was raised at a rate of 10 basis points over Libor (London Inter Bank Offer Rate) under a programme sponsored by the USAID as part of financial institution reforms and expansion. The US government guarantee had enabled the project to secure the fine spread. The loan has a review option after every ten years.

While advising against taking forward cover, IL&FS has mooted the adoption of a targeting method. This involves locking into a forward cover rate if the rupee depreciates beyond a particular targeted level, IL&FS officials said.

However, IL&FS officials said that ideally no forward cover was required as there was no fund outflow. This effectively meant that the exchange risk element was minimal as the dollars were never brought in.

Instead the $25 million was deposited in the Bank of Indias New York branch at six basis points over Libor. There was no need to take a forward cover on a continuous basis as there is no fund outflow. The difference of four basis points is negligible, the officials said.

The cost of funding the project has been reduced considerably. Sourcing funds from the domestic financial institutions would have cost about 16.5 per cent

Using this kind of a funding method , the effective cost of the funding is around 12 per cent, they said.

The project had raised these funds for the water supply and the sewerage projects, for which financial bidding was under way.

This is the first time that foreign currency funds have been sourced from agencies other than multilateral institutions with the support of a US government guarantee.

It is also the first time that such long term funds are being used for a water supply project.