The Hindu Business Line : ECB norm revision

The easing of External Commercial Borrowing (ECB) rules for infrastructure companies (or core sector companies), allowing them to borrow higher amounts with a higher interest spread may only provide partial relief to the cash-strapped sector. Only a few companies, that too with high credit rating, may actually manage to tap funds from the overseas market given the current global credit crisis.

In a move aimed at providing support to the depreciating rupee and accelerating the pace of infrastructure projects that were facing delays in financial closure, the Government has raised the borrowing limit for individual companies in the sector to $500 million from $100 million earlier. It has also increased the interest spread ceiling by 100 basis points to 450 basis points over the 6-month London Bank Offered rate (LIBOR) for ECBs with a minimum maturity of 7 years. For instance with the current LIBOR at about 3.5 per cent, infrastructure companies are allowed to borrow at 8 per cent (450 basis points above LIBOR) provided the maturity of the ECB is at least 7 years.

Who benefits?

Infrastructure developers with long-term cash generating assets such as airports and power could be companies that are likely to benefit from the above move. Companies such as GMR Infrastructure or power generation companies could fit under this category. Telecom companies wanting to participate in the 3G auction are also stated to be beneficiaries.

However, there are a number of riders that limit the benefits from this move even for large companies. For one, the global credit crisis is likely to result in a scenario of ‘selective supply’ at a ‘premium price’ for highly creditworthy companies. Even then, raising sums as high as $500 million at a cost that is economically feasible remains a challenge. The highly volatile cash flows for infrastructure companies combined with the fact that very few enjoy high credit ratings (AAA) put them at a disadvantage. Two, a good number of companies typically borrow with tenure of 5 years. Utilising the increased credit spreads for a seven-year tenure would be feasible only for companies with long-term cash flow generating assets. This essentially means that sub-contractor companies may not benefit much from the move.

Cost and not availability

For one, most of them borrow funds with a 3-5 year tenure, where the interest spread ceiling remains the same at 200 basis points over LIBOR (about 5.5 per cent at present). This makes the option almost infeasible. Smaller companies have already been facing issues with borrowing at costs that do not dent their profitability.

Cost of borrowing has gone up by 300-400 basis points to 12-14 per cent for a good number of companies over the past year. According to RBI data, outstanding lending by banks to the infrastructure sector stood at Rs 2 lakh crore as of May 2008; the lending has grown 42 per cent over a year (May 2007-08), higher than 33 per cent last year. This suggests that it is the cost of borrowing and not so much of non-availability of funds that has been an issue with many companies.

Assuming that infrastructure companies look at actively tapping the overseas market, the cost of borrowing combined with the cost of hedging the currency risks (given the present volatility) may provide very little advantage over domestic borrowing rates.

A peaking out and reduction of domestic interest rates could provide a more lasting relief to the funding scenario of infrastructure companies.

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