BANKING
| Lower rates, hedging costs make dollar loans a hit among Indian corporates Thu, 26 May 2011 03:43:07 GMT |
| MUMBAI: Foreign loans have suddenly emerged as a very attractive proposition for Indian corporates given the interest rate differential and a sharp drop in hedging costs. Top Indian corporates can now raise fully hedged foreign loans at 100 to 200 basis points below domestic loans. This arbitrage opportunity has led to banks seeing rising inquiries. While Reserve Bank of India has been steadily raising rates for more than a year, the US Federal Reserve has stayed away from rate hikes. "US dollar benchmark interest rates are close to their historical lows. This, coupled with very tight credit spreads, have made borrowing in USD a very attractive proposition. Even after swapping to INR, the all-in cost works out to be attractive than rates available in the INR markets currently ," said Rajiv Nayar, MD & head of Capital Markets Origination, Citi India. Reliance Industries , which completed a $1.5 billion bond issue led by Citi, is understood to be eyeing the global markets once again. Vednata is understood to be looking at a $1.5 billion bond issue to fund its Cairn purchase. Bharat Petroleum recently raised a $200 million syndicated foreign currency loans and a host of banks including ICICI Bank with its $1 billion offering have tapped the market with mediumterm notes. "From the cost of funds perspective, foreign loans are an attractive proposition" said Prakash Subramaniam , MD and regional head, capital markets, South Asia at Standard Chartered Bank. He points out that this market is available for large toprated corporates which foreign investors perceive as investment grade. He points out that for a company that has to pay a spread of 300 basis points over Libor , the fully hedged borrowing cost would be below 10% which is less than what it would pay in India. "Besides allowing issuers to diversify their funding base, the international markets also allow corporates to raise large amounts in the range of $500 million and $1 billion through bond issues considering that bond markets here do not have such depth," he added. "One positive for borrowers is the big drop in cost of hedging foreign loans which has come down by almost 150 basis points in recent weeks" said Ashish Vaidya , head of fixed income currency and commodities at UBS. "The biggest gains are for those looking at hedging loans of a two-year tenure" he adds. Hedging cost refers to the premium paid by a borrower to ensure that he does not have to repay a larger amount in local currency because of currency depreciation. |
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