The Hindu Business Line : Borrowing overseas is not attractive enough for cos

The reasons for bias
“AAA” rated borrowers for infrastructure projects get funds priced at discounts as high as 200 basis points below BPLR of 12.5 per cent
In current market conditions, even sovereign- backed entities are finding ECB pricing stiff, at about 400 basis points above LIBOR.
Guarantee fees and hedge against the exchange rate fluctuations push up cost of overseas borrowings.

C. Shivkumar

Bangalore, June 3 Faced with the high costs, the domestic corporates, do not find external commercial borrowings (ECB) attractive, despite the relaxed guidelines

Top bankers said that the bias was weighted in favour of domestic sources, with banks aggressively pushing credit. The banks have refrained from passing on increased costs of working funds in view of slack credit off take since the beginning of this financial year.

Bankers said that for “AAA” rated borrowers for infrastructure projects, the funds were priced at discounts as high as 200 basis points below the current bench mark prime lending rate of 12.5 per cent. For infrastructure projects, domestic banks have put in additional sweeteners that include an interest rate reset only after three years.

On the other hand, the cost of foreign currency funds was considerably higher or higher than the RBI-revised ECB spread over the London Inter Bank offered Rate (LIBOR). Last weekend, the RBI raised the ECB interest spread ceiling to 350 basis points over LIBOR from 250 basis points. In current market conditions, even sovereign- backed entities are finding pricing stiff, at about 400 basis points. For sub-sovereign or non sovereign entities, bankers said the ECB spreads were even higher.

Cost of guarantees

Moreover, foreign currency loans are seldom clean loans or on the basis of physical asset cover. Instead, ECBs are supported by guarantees from domestic banks and financial institutions. For power projects, the guarantees are usually provided by State Bank of India or Power Finance Corporation of India Ltd. Guarantee fees range between one and two per cent. In addition, borrowers also hedge against the exchange rate fluctuations. Six-month forward cover is currently available at about 2.5 per cent. Accordingly, the effective cost of foreign currency funds is closer to 11 per cent. These costs are based on LIBOR that is presently 2.2 per cent.

Moreover, bankers said that ECB upside risks were high, since interest is reset every six months.

Accordingly raising foreign currency resources for funding projects where the earnings were in rupee involved considerable financial risks, they added. Foreign currency loans, they said was attractive only in port or in airport projects that have natural hedges, in the form of foreign currency earnings.

Viability concerns

In the case of the power projects, bankers said, using foreign currency funds could undermine project viability. This was because power projects are currently awarded on the basis of tariff bids. This implied that there was very little flexibility for passing through cost escalation to consumers. Consequently, the preferred source was still rupee funds. In fact during the last few months, most borrowers had raised funds through rupee term loans, for meeting even their foreign currency-based capital expenditure. This trend was expected to continue for the next few months as well, the bankers said, till such time as the global financial markets cool off.

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More Stories on : Credit Market | Overseas Borrowings

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