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Corporates go slow on ECB plans — Ratings upgrade on cards; domestic tap also attractive

C. Shivkumar

Bangalore , Feb. 12

CORPORATES have put on hold their plans to raise foreign currency funds through the external commercial borrowings (ECB) route.

The Ministry of Finance last month had raised the ECB ceilings to $500 million (around Rs 2,261 crore) from $50 million (around Rs 226 crore) for tenors of five years and above. However, most ECB proposals are still on paper.

Only banking institutions have raised funds, mostly short-term. Among the corporates which have plans for raising five year plus ECB funds are Reliance, the Tatas, public sector companies and almost all companies planning investments in infrastructure projects.

Banking sources said here that the move to defer the borrowings from the international markets was in anticipation of a further upgrade in the country's sovereign rating. So far only Moody's and Fitch have shifted India's sovereign ratings to investment grade.

Borrowers were still awaiting a Standard & Poor upgrade as well. Bankers said that it was only at this stage that large borrowers would take advantage of the relaxed ceiling.

Mr V. Ravikumar, Executive Vice-President of the ING Vysya Bank said, "An upgrade will improve the ECB spreads."

Currently, the average spreads at which ECB funds were raised by domestic corporates for maturities above 5 years was about 300 basis points over the London Interbank Offered rate (LIBOR). A rating upgrade was expected to shave spreads by at least 100 basis points.

Bankers said that the ECB deferral was also due to riders. The riders disallow bank guarantees. This would mean that the liabilities would have to be absorbed directly into the balance sheets of the borrowing entities. Alternatively, bankers said, project loans would have to be supported by corporate guarantees.

Besides, the reluctance to tap ECB markets at this juncture, bankers said, also stemmed from the complete choking of arbitrage options. Bulk of ECB proposals were in fact lined up for refinancing domestic debts.

This essentially implied taking advantage of the low international interest rates and forward premiums. ECB funds are priced at around 4.5 per cent for five year plus. This allowed borrowers to shed the domestic borrowings where the pricing was close to about 8 per cent. Sources said restrictions on end use had also dampened the enthusiasm to tap ECB markets. The RBI guidelines specify that funds would have to be parked abroad and drawn only for capital expenditure.

Parking funds abroad would mean that the borrowers would incur a cost of about 300 basis points (3 per cent) on safe investments, banker said. Consequently, any borrowings could be expected only when the capital expenditure plans are firmed up, they added. Few corporates are interested in ECB funding for working capital, as most top corporates are already cash surplus.

Mr Cherian Varghese, CMD, Corporation Bank, said, "Where is the need for ECBs, when domestic banks can meet project financing requirements at competitive costs without exchange rate risks?"

In fact some of the domestic banks have been putting together financing packages obviating or limiting the need for foreign currency funds at costs as low as 6 per cent for large corporate entities. The domestic markets are in fact beginning to look a lot more attractive.

  • Borrowers await rating upgrade by S&P.

  • Hope rating upgrade to shave costs by at least one per cent (100 basis points).

  • Absence of Bank/FI guarantee raises lending risk.

  • End use norms spike hopes to refinance domestic loans with ECB.

  • Domestic banks offer competitive pricing for project term loans.

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