Nuke Tests Hamper Pfc Issue Prospects

International investment banks are reluctant to pick up Power Finance Corporation's $100 million term loan facility due to the sanctions imposed on India following the nuclear tests.

This is the first major syndication for an Indian borrower since the south-east Asia crisis and is a test case for an Indian debt paper in the international market.

Sources point out that the issue in itself is excellent with a pricing of 115 basis points over Libor. But, with the imposition of sanctions, not only the US banks but also those from European countries are reluctant to invest.

The fact that Power Finance Corporation (PFC) is fully owned by the government has worked against the issue. Sanctions have stated that US Banks should not lend to the government and banks are not clear if this includes government-owned entities.

Says a banker associated with the deal: "Though banks in Europe are not affected, they are taking a cautious stand and have told the issuers that they will invest only after the implications of the sanctions are clear."

There is fear that the value of the paper might fall in the overseas markets in case the sanctions are interpreted to have very adverse reactions on the Indian economy. This will force investing banks to make huge provisions towards the depreciation of the security. In fact, the prices of Indian debt paper has been volatile after the sanctions.

The fate of the PFC issue will have a bearing on the future issues out of India. "After the bomb tests there have been a number of statements from Indian authorities that the sanctions will not pinch. Meanwhile, foreign governments said that the economy will be hurt. The reluctance of international banks to pick up papers of PFC shows that the impact is now being felt."

ANZ Grindlays Investment Bank is arranging the $100 million term loan facility for PFC at an all-inclusive cost of 125 - 128 basis points over Libor.

The 7-year loan with a put option at the end of 5 years will be priced at 115 basis points over Libor. PFC has been rated Baa3 by Moody's.

According to the lead managers, there has been a decline of interest in Indian paper among Japanese and Korean Banks. This has primarily led to PFC being forced to offer a higher rate _ double that of what was offered last year.

According to the unaudited accounts, PFC has posted a profit after tax of Rs 481.5 crore. This is against a PAT of Rs 240 crore posted in 1996-97. PFC is targeting disbursal of Rs 2,250 crore in the current fiscal.