A Quick Exit

Even if it is for the purpose of re-financing, this brings down the average cost of funds for the corporate.

There are other attractions, too.The lower rates at the shorter end also translate into a better net present value (NPV) for the borrower, even if the borrower prefers to allow the loan to run its entire tenure. Thirdly, if the borrower is resorting to a step-up for a long gestation project or a greenfield project, the low interest outgo in the initial stages could be a boon. And thats not all. Corporates are also working out the economics of shouldering the onerous one-time burden of the bullet repayments required in some other forms of ECBsand discovering that the graded interest burden of step-ups is a more comfortable option.

 

The other factor that is likely to contribute to the popularity of the structure is the perception that this route will actually receive the blessings of the MOF and the Reserve Bank of India (RBI). This is true, given the fact that the structure makes pre-payments even more attractiveand therefore prevents the bunching up of external debt repayments. In fact, with the ministry of finance being more concerned about the total outgo than individual pre-payments, there is a strong belief in the corporate sector that even unconditional pre-payment may be allowed more often eventually, though on a selective basis. This is quite a possibility, since it will enable many more borrowers to access low cost ECBs within the MOF-favoured annual ceiling for such borrowings.

Of course, even the convergence of all these factors would not have been able to kickstart an active market for this structure, if there had not been an increased appetite for seven -year paper. Barely two years ago, very few international investors would have been willing to look beyond the five year horizon as far as India is concerned. Says Rajesh Narayan, manager, international structured finance, ANZ Grindlays Bank: The interest in the seven year tenure is conducive to this instrument. The tenure is long enough to allow the different interest slabs to be structured properly. This would have been difficult in the case of a five year tenure. And its obvious from the profile of syndicate participants and the fine rates that many foreign banks are evincing interest for the sake of building up a relationship with blue chip Indian borrowers.

Says Ramesh Venkat, head, corporate banking & resources, Credit Lyonnais: Given the interest in the India story, many global banks which do not even have rep offices in India and are not familiar with the scenario here have found that participating in a popular variant of a syndicated loan is an easy way of gaining exposure and a foothold in India. Besides, the stiff RBI entry norms for participation in a consortium would have made it otherwise impossible for such banks to acquire blue chip clients on their asset portfolio. It is interesting to note that apart from well-known names like Sanwa and Sumitomo, there are banks like Bank of Belgium, Credit Bank, and a host of other banks from Japan, Korea and the Middle East.table>