Despite Rate Cuts At Home, Corporates Tap Cheaper ECB Funding
This pricing advantage, coupled with the ability to raise a larger deal size that also opens up new investor pools, is driving more NBFCs to tap overseas markets.
Despite sharp rate cuts by the Reserve Bank of India and ample liquidity injection, several companies especially those rated AA+ and below are increasingly turning to overseas markets for their funding needs, five people told NDTV Profit.
While top rated AAA borrowers enjoy strong demand and fine pricing at home, AA rated bonds are still being priced at a premium, making the external commercial borrowings and dollar bonds more attractive for them, a senior merchant banker at a private sector bank said.
For instance, Rural Electrification Corp., a frequent issuer, on Monday raised Rs 4,000 crore through a two-year bond at a coupon of 6.6%. This is 175 basis points lower than what AA rated JSW Energy Ltd. paid for its two-year paper earlier this month, where it raised Rs 250 crore.
“Given that AAA rated borrowers are issuing bonds strongly at a fine rate in the domestic market, it is possible that the lower rated ones are tapping markets abroad because they are getting a relatively better pricing there than here,” Killol Pandya, head of fixed income at JM Financial Asset Management, said.
On a fully hedged basis, overseas borrowing for an AA rated paper is being priced at around 8%, one of the merchant banker quoted above said.
This pricing advantage, coupled with the ability to raise a larger deal size that also opens up new investor pools, is driving more NBFCs to tap overseas markets.
In the financial year ended March, Indian companies raised $61.13 billion through ECBs, with NBFCs and financial institutions leading the charge.
The pipeline continues to remain strong with talks of National Bank for Financing Infrastructure and Development planning to raise up to $1 billion. IIFL Finance is also planning to borrow another round of overseas debt and Housing and Urban Development Corp. is targeting $500 million in the Yen market.
Recently, Adani Airports Holdings Ltd., a wholly subsidiary of Adani Enterprises Ltd., raised $750 million through notes maturing in four years at a coupon of 6.9%. The airports company is rated BBB-.
Aseem Infrastructure Finance Ltd. has raised $80 million through its first green ECB loan maturing in three years at an annualised yield of 8%.
Merchant bankers also believe that while larger corporates may wait for better US rate conditions, NBFCs and lower-rated corporates are moving quickly to lock in attractive overseas funding.
Further, raising funds through ECBs is cheaper than borrowing through bank loans domestically as lenders have only slightly reduced their marginal cost of funds based lending rate, despite a cumulative 100 basis point policy cut.
The one-year median MCLR of scheduled commercial banks moderated to 8.95% in May from 9% a month ago, recent RBI data showed.
Usually, when Indian companies tap the dollar market for funding, they refer to MIFOR to assess the all-in cost, factoring in both the spread and the forward premium, which together reflect the total currency risk.
At present, the secured overnight financing rate stands at 4.28%. Indian firms pay a spread over SOFR that ranges from 130 to 250 basis points, depending on their credit rating. Additionally, the cost of hedging foreign exchange exposure averages about 2%, leading to a total ECB cost of 8.00-8.50%.
While the RBI is signaling limited headroom for further rate cuts and credit demand softening, the momentum for overseas funding is expected to continue especially among lower-rated entities.
