Indian Oil Corporation, the public sector navaratna, raised $500 million (more than Rs 1,800 crore) through a one-year debt issue in the overseas market in May. Not a huge amount by Asia-Pacific standards. But the tab on the issue astounded Indophile-economists "" 23 basis points (a point is one-hundredth of a per cent) over the London interbank offered rate (Libor). This was a new low for Indias premium borrower.
A Steel Authority of India Ltd (SAIL) foray into the market to pick up $100 million (Rs 360 crore) saw Sumitomo Bank underwriting the loan at a reported 65 basis points over Libor. An Industrial Development Bank of India two-year loan (arranged by Fuji Bank) was sourced at Libor plus 20 basis points, while Oil and Natural Gas Corporation (ONGC) managed the same amount at around 50 basis points over Libor.
A $300 million (Rs 1,080 crore) Reliance Petroleum debt offering saw international investors falling over each other to book orders with ABN Amro, the lead arranger. This greenfield project (the 15 million tonne per annum capacity refinery) is reported to have picked up money at around two per cent over Libor.
Compare these deals with monies raised by corporates from countries in the Asia-Pacific region and the contrast becomes stark; particularly when one considers Indias country rating which has been pegged around the speculative grade by both Standard & Poor and Moodys (rating: Baa3). LG Telecom of Korea (country rating: A1 by Moodys) concluded a $100 million (Rs 360 crore) five-year debt deal at 60 basis points over Libor. Everbright Finance & Investment Ltd of China raised $1.05 billion (Rs 3,780 crore) in a one-year loan. Syndicated at a cost comparable to the IDBI $100 million loan, the deal was guaranteed by China Everbright Holdings Co Ltd. And, Chinas sovereign rating? A3 by Moodys.
The paradox of debt
How does one explain this seeming contradiction? How is it that Indian corporates are raising money at interest rates better than their counterparts in countries with better ratings? (see table). Interest rates are primarily driven by three factors: the tenure of the loan; risk-profile of the borrower (including perceived country-risk); and, finally, the relationship between the borrower (or its loan-arranger) and lending banks. Going by these yardsticks, the recent Asia-Pacific deals listed alongside are not strictly comparable, but nevertheless are indicative of the pricing of such transactions.
Bankers offer some explanations for such a paradoxical trend. One, most banks committing monies to the Asia-Pacific are still conservative about the countries in the region. (Never mind, the were very, very bullish on... refrain.) And, this conservative attitude is reflected in the strict country exposure limits the banks have evolved internally. Although bankers will not reveal the limits, it is estimated that countries have limits varying between 5-15 per cent. Banks will be willing to expose themselves more towards the upper limit for a country like China, but will be a little wary of moving significantly more than 5-6 per cent for India, says the head of project finance (Asia-Pacific) of a US bank.
However, Indian borrowers do not even use up these limits in the banks debt portfolios. Says Vijay Chopra, director (Asia), project finance and structured debt, Banque Nationale de Paris: It is very clearly a demand-supply situation. The paper coming out of India is so limited and money with banks so vast that (interest) rates are bound to be competitive. Many banks use up their limits on (other) countries in the region so fast that they have to get back to headquarters to increase the limits.
In essence, therefore, Indian borrowers have been taking advantage of several competing banks vying to use up their credit limits for the country. The converse works for borrowers from other countries in the region. Since these borrowers "" even prime ones "" are chasing capital which is released over the country limits set by banks, the rates tend to be on the higher side.
Further, says J Radhakrishnan, vice-president (syndications), BankAmerica Singapore: Some years back, there were hardly 20 banks which had an exposure to India. Now the number is significantly higher. The strategy for the new banks entering the fray is clear: they want to make sure that they have a toehold in the market which is expected to boom in a few years. This is especially true for Japanese banks like Sumitomo Bank (witness the SAIL $100 million borrowing at 65 basis points over Libor).
The volume of external commercial borrowings (ECB), which was some $7.5 billion (Rs 27,000 crore) last fiscal, is expected to increase sharply as some of the mega power and telecom projects near financial closure. For instance, assuming a conservative $100 million (Rs 360 crore) overseas debt requirement for each cellular telecom circle, the total ECBs expected is over $3.5 billion (Rs 12,600 crore). Requirements for the 12 basic telecom circles are projected to be in excess of some $ 5 billion (Rs 18,000 crore). Similarly, each mega power project is expected to soak in some $250 million (Rs 900 crore) in foreign debt.
Standard, poor and moody ratings?
The fine rates at which Indian corporates have been able to leverage funds abroad raises certain fundamental questions about country ratings by agencies such as Standard & Poor (S&P) and Moodys. For instance, Moodys Investors Service has predicted a worsening of Indias fiscal deficit in the near term. The agency expressed concern over Indias macro-economic situation, despite this years market-friendly budget. According to a recent report from the agencys New York-based India desk, the countrys increasing current account deficit (trade deficit plus net invisibles) is worrisome, particularly given the apparent slowdown in growth and exports. The country is overly reliant on volatile external capital inflows, it concluded.
Both Moodys and S&P had hit the headlines in February and March this year when they made predictions which were strongly refuted by the government. While S&P had actually downgraded India to below-investment grade rating, Moodys in a February report had projected an unfavourable outlook for the Baa3 rating of the country. In its typical style (termed esoteric by some), it blamed an unstable political environment, directionless economic policies and a deterioration in the macroeconomic balances for such pessimism.
Not all bankers agree with the diagnosis. Says the head of project finance (Asia-Pacific) of a US bank: Internally we dont agree with the ratings of the agencies. We have our own (rating) methodology which we base our disbursements on. Going by that, India is pegged higher than countries like Indonesia and certainly higher than Thailand (referring to the recent wild fluctuations in the countrys currency and stock markets).
Says the managing director of a German investment bank: Indias fundamentals are certainly stronger than those of other countries in the region barring maybe China, Malaysia and Philippines. And, this is best reflected in the rates that the market gives it. After all, who rates countries and corporates more efficiently than the market?
Perhaps here lies a question for S&P and Moodys. Particularly since the former is reviewing the countrys rating. (It has already rated India as below-investment grade.) Why is it that banks dont mind lending funds to Indian companies at rates better than their counterparts in better-rated countries? Could it just be that the banks know something that S&P and Moodys have overlooked?
