Top Firms Raising Funds At Less Than Fi Lending Rates

Reliance Industries (RIL), Grasim Industries and Larsen and Tubro (L&T) are raising five year money at rates below the long term prime lending rates (PLR) of financial institutions.

These companies are raising funds in the range of 14.5 per cent and 14.75 per cent which is below the 15 per cent PLR of Industrial Development Bank of India (IDBI) and Industrial Credit and Investment Corporation of India (ICICI) .

The Rs 100 crore maiden, pure debt issue of RIL in India, which collected Rs 180 crore on Saturday, carried a coupon of 14.5 per cent. The issue is slated to close on Monday evening when the company will take a decision about the retention of oversubscription.

 

All earlier RIL issues in the domestic market were partly convertible or fully convertible debentures. The attempt to raise Rs 100 crore was just to set a benchmark for the company and not fund any major requirement.

With RIL, a triple A rated company setting the benchmark at 14.5 per cent, some sort of an yield curve is likely to be established for a private sector company. Market sources point out that there is now an inter-linkage between the private sector and public sector bond.

Issues from Steel Authority of India Ltd (SAIL), a PSU which is a double A rated company, carries a coupon of 14.5 per cent, and so does offerings from RIL, a private sector Triple A rated company. However, unlike SAIL, RIL cannot tap provident funds and trusts, and hence has a smaller pool of resources to dip into for funds.

The subscribers to the RIL issue are financial institutions, nationalised banks, new mutual funds, and, to a small extent, regional rural banks.

RIL's cost of funds through the bond issue is much cheaper than it appears. Even though IDBI's prime rate is just 15 per cent one has to add the interest tax, upfront fee, and the fact that its interest payments are quarterly with which the rate goes up by another 125 basis points. RIL's interest payments on the NCD are half-yearly .

That apart, with the RIL coupon pegged at 14.5 per cent, the margin between government paper and the paper of a private sector company has narrowed down.

For instance, when private sector companies were raising funds last year at around 19 per cent to 21 per cent, the yield on five-year paper was around 13.75 per cent. This meant an average spread of around 500 basis points. Now, with the government borrowing at 12.69 per cent and RIL at 14.5 per cent, the spread is down to 181 basis points. Top corporates like Grasim and L& T are also planning to raise funds through 5-year papers . Banking industry sources expect the coupon on such issues to be in the range of 14.50 per cent . Market sources indicate that Grasim is eyeing about Rs 75 - 100 crore at a coupon of 14.75 per cent.