The Hindu Business Line : Public sector cos tapping bond market for funds

Bangalore, Nov. 20 Public sector entities are increasingly tapping the domestic bond markets for funds with External Commercial Borrowing (ECB) window remaining choked.

Bankers said PSU issuers including specialised power financiers - Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) - remained as the largest borrowers in the last two months.

The two entities together raised about Rs 7,000 crore during the last two months. PFC raised about Rs 4,500 crore and REC, the rest. Both the entities raised the funds at rates ranging between 10.8 and 11.5 per cent

Bankers said that although both the entities had the option of raising long term resources through ECB window, there was little inclination to do so.

High spreads

Pricing, the bankers said, remained a critical issue. Currently the Reserve Bank of India’s mandated ceiling is 500 basis points over the London Inter Bank offered Rate ( LIBOR). But bankers said at these rates long term cross border funds were simply not available.

Dun and Bradstreet India’s Head of Economic Analysis Group, Ms Yashika Singh, said, “In the current global liquidity environment, accessing ECB funds will remain difficult.”

Risk aversion of global lenders was evident from the high spreads between U S treasuries and Triple “A” rated borrowers. This spread is currently about 300 basis points.

Consequently, bankers said with India’s credit rating at investment grade, the spreads are likely to be far higher than the prescribed ceiling.

Few exit options

But bankers hastened to add that even if the ceilings were relaxed, few would prefer cross-border funds at this juncture.

Tapping ECBs implied locking into a fixed spread over a longer period, with few exit options. Currently, six month, LIBOR, which is the most commonly used benchmark for fixing spreads, is about 2.6 per cent. A mark-up of 600 basis points would imply a cost of about 7 per cent.

Inclusive of swap and hedging, the effective costs were likely to be well over 11 per cent. Corporate issuers, till two years ago, raised funds at far lower spreads than what is prevailing now.

In 2006, corporates such as PFC had raised foreign currency borrowings at rates as low as 125 basis points. As a result, most of them now preferred to wait for some more time, till such time as global credit markets stabilise.

Corporate borrowings

In the meanwhile, issuers prefer tapping the bond markets. Traders said that corporate bond prices were likely to drop further in the coming weeks as the RBI steps up liquidity availability.

Interventions last month have already had its impact on corporate borrowings. Traders said that some of the front-end discounts offered for soliciting subscription have vanished. (Front-end discounts implied offering the bonds at below the face value to increase the effective yields).

However, despite prices for domestic bonds retreating, bankers said the spreads over sovereign issues remained. For instance, the PFC issue that closed on November 19 was priced at 11.40 per cent for five years, or a spread of 400 basis points over the comparable sovereign bond issue.

The pricing, however, was at a discount of 260 basis points over the current benchmark prime lending rates of 14 per cent.

More Stories on : PSU | Corporate Bonds | Overseas Borrowings

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