RBI may revisit ECB framework to allow lower-rated firms tap overseas debt market

The Reserve Bank of India (RBI) may revisit its external commercial borrowing (ECB) framework, relaxing parameters such as all-in-cost (AIC) ceiling, tenor, and end-use of funds to enable lower-rated Indian corporates tap this funding route in the backdrop of domestic banks turning risk-averse.

While foreign investors have appetite for Indian debt, the AIC ceiling (includes rate of interest, other fees, expenses, guarantee fees) needs to move higher to reflect the new credit risk and operating environment, according to Arun Saigal, MD and Head of Debt Capital Market, Barclays Bank, India.

This will allow lower-rated borrowers to access offshore debt funds, he added. ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities. They have to conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling (a company cannot pay more than 450 basis points over the benchmark rate (London Inter Bank Offered Rate).

Relaxation in guidelines

Saigal hopes to see a relaxation in ECB guidelines if foreign capital is to finance India Inc’s needs. He observed that at the current pricing cap, tenor, and end-use restrictions, the overseas debt market is not available for non-high grade companies .

“The interesting thing is that as opposed to our credit markets where liquidity dries up beyond ‘AAA’ (top credit rating), I think, globally, we continue to see demand for Indian and other credit across the spectrum.

“So, the reality is, capital is available for Indian companies, albeit at a higher price. And, therefore, a relaxation in ECB guidelines is important to attract that money,” explained Saigal.

Referring to REC raising $500 million via 4.75 per cent notes due on 2023, Saigal emphasised that this trade itself was close to the ECB cap for the highest grade rating that the company has.

This effectively means that unless there is a tightening of yields or relaxation in ECB guidelines from the RBI, it will be difficult for high yield issuers to issue out of India in the near future.

Underscoring that three years to five years is where investors have appetite, Saigal said at this stage most of the money is required for funding of ongoing expenses and refinancing.

“I don’t think there is too much capital expenditure that is being planned. And if issuers are forced to raise money for 7 to 10 years, it would impact availability of capital and it would be expensive,” he explained.

Buy-back dollar bonds

Barclays Bank has come across a trend of investment grade (IG) rated corporates looking at buy-backs of some of their dollar-denominated bonds, especially near-term maturities, which are trading wider than where bank financing is available.

Saigal observed that many IG-rated companies continue to have liquidity on the balance sheet and are also attracting funding from banks. So, due to the combination of on balance-sheet liquidity and bank support, IG-rated companies will opportunistically consider buy-backs (of bonds maturing in the next 12 to 24 months), providing liquidity to investors and also demonstrating the underlying strength of some of these borrowers.

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