* Loans: Onshore volatility, regulation change add to appeal for borrowers to go offshore
By Krishna Merchant and Prakash Chakravarti
SINGAPORE, May 14 (IFR) - Volatile domestic markets and a relaxation of overseas borrowing rules are sending more Indian companies into the offshore loan markets. The Reserve Bank of India last month relaxed the external commercial borrowing (ECB) regime, raising the maximum interest rate and widening the pool of eligible borrowers to include housing finance companies. The change opens an alternative source of funding for Indian issuers who are facing higher interest rates in the domestic market. Housing Development Finance Corp, Indiabulls Housing Finance and Housing and Urban Development Corp are among the companies considering offshore loans. “We shall now have a greater predictability in our fundraising plans and it offers a certain degree of flexibility in terms of deployment,” said Ajit Mittal, executive director at Indiabulls Housing Finance. Frequent borrowers such as Rural Electrification Corp and Power Finance Corp are also looking to benefit. Last week REC sent a request for proposals for a five-year loan of at least US$250m, marking its return to the offshore loan market after only a couple of months. PFC is also exploring dollar loans, although it mandated four banks last month on a 10-year dollar bond. Small Industries Development Bank of India, a frequent bond issuer in the onshore market, has sent out a request for proposals for a Rs50bn (US742m) five-year offshore Masala bond. The move follows Sidbi’s cancellation of a Rs5bn tap of its 2021 rupee bonds late last month. ONSHORE SPIKE Conditions remain challenging in the onshore debt markets, where risk appetite among lenders is weak following a series of scams and scrutiny on lending practices that have hit the country’s banks. A spike in bond yields has made matters worse, while the introduction of a more efficient electronic system for bond issues from April 1 is having the unintended effect of raising costs for the country’s borrowers. “Investors are asking for higher levels, the bid sizes are not enough and yields have spiked [in the onshore bond market]. This has prompted issuers to tap overseas borrowing by the ECB route,” said Ajay Manglunia, head of fixed income at Edelweiss Financial Services. Late last month the central bank set a single all-in-cost ceiling of 450bp over six-month Libor for dollar bonds and loans, replacing a maximum spread of 300bp at three to five years and 450bp at five years or more. Housing finance companies and port trusts will also be eligible to borrow overseas, subject to hedging requirements. It is not all smooth sailing in the offshore markets, however. A sell-off in the global market due to rising US Treasury yields forced JSW Steel to scrap plans for a dollar bond. In March, the Indian steelmaker met investors and held calls for a 144A/Reg S offering of five to 10-year bonds. The company is now eyeing a dollar loan of US$300m with a greenshoe of a similar amount and five to 10-year maturity. It has an approval from the RBI to raise up to US$750m from the ECB route. CHEAPER THAN BONDS Offshore loans might turn out to be cheaper for Indian borrowers. JSW Steel baulked at paying a potential 6.25% yield on its five-year bond, while its outstanding bonds due in April 2022 were trading at a yield of around 6.20%, or 320bp over Libor. JSW Steel would be able to raise five-year money through a dollar loan at a much tighter level of around 240bp–250bp over Libor, according to loan bankers. “We are looking at all possible sources to raise funds to finance growth,” said Seshagiri Rao, joint managing director of JSW Steel. The company’s most recent visit to the loan markets was in March for a US$244m-equivalent trade finance loan from Japan Bank for International Cooperation and commercial banks. Nippon Export & Investment Insurance provided the cover for the commercial portions. Prior to that, JSW Steel’s last loan was a US$250m five-year facility in March 2015 with seven banks. That loan paid a top level all-in of 325bp over Libor via a margin of 306bp over Libor. A new loan will compete with a US$1.86bn-equivalent six-year financing for Tata Steel that is in general syndication. The loan has 23 lenders in the arranger group and follows Tata Steel’s US$1.3bn 5.5 and 10-year bond that printed in January paying coupons of 4.45% and 5.45%, respectively.
Reporting by Krishna Merchant and Prakash Chakravarti; Editing by Steve Garton