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Thursday, 18 September 2014

Casting a wider net

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Indian companies have had to adjust their expectations for foreign currency funding, as European banks pull back and lenders fret about India’s economic outlook. Recent deals, however, have set a new benchmark for others to follow.

Fisherman casts his net in the waters of River Ganges in Allahabad

Source: Reuters/Jitendra Prakash

Fisherman casts his net in the waters of River Ganges in Allahabad

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With liquidity shrinking and lenders becoming more selective about where they deploy their balance sheets, India is bearing the brunt of the slowdown in Asia’s loan markets.

The threat of a rating downgrade in the next 12–18 months has reduced the appeal of Indian paper, and India’s borrowers are being forced to face up to a new reality – they no longer call the shots when it comes to overseas loans.

Indian banks best reflect this changing dynamic, as only one name – Yes Bank – braved the markets in the first half of the year. Indeed, Yes Bank’s US$75m three-year loan, signed in mid-January, was a two-bank club paying a margin of 230bp over Libor.

Contrast that with the bank’s US$90m one-year loan signed in May 2011 at a margin of 85bp over Libor and a top-level all-in of 150bp in syndication.

After Yes Bank’s modest return, it took another six months for the next Indian bank to come to the offshore loan markets. ICICI Bank’s US$275m three-year loan in July was a seven-bank club paying an all-in of 295bp via fees of 120bp and a margin of 255bp over Libor.

Yes Bank also came back for more in July, with a US$216m-equivalent one-year dual-tranche loan that received a better reception than its January borrowing. The pricing on the July loan, which paid a top-level all-in of 205bp via a margin of 110bp over Libor, was a big draw, attracting 14 banks.

Subsequent financings have showed that foreign lenders still have some appetite for Indian risk – but at a very different price.

In early August, Indian Overseas Bank launched a US$100m two-year loan paying a top-level all-in of 240bp via a margin of 175bp over Libor. Like Yes Bank, IOB’s previous visit was in May 2011, when it raised US$85m through a three-year loan paying a top-level all-in of 165bp via a 130bp over Libor margin.

Bank of India, another frequent visitor, launched a US$175m two-year transaction through seven banks, paying a top-level all-in of 215bp via a margin of 175bp over Libor. At the time of writing, BoI’s loan had received just one commitment in general for US$15m.

A year earlier, it raised US$200m from a three-year loan paying a top-level all-in of 150bp via a margin of 129bp over Libor. Thirteen banks participated in that financing.

The latest to tap the loan markets is IDBI Bank, which is expected to sign a US$250m three-year facility as a 10-bank club. The borrowing pays all-in pricing in the high 200s.

Creative thinking

IDBI’s latest financing is the odd one out. It is priced tighter than its last loan in December when the bank paid all-ins of 280bp and 310bp, respectively, on the two- and three-year tranches of a US$175m facility.

The maturity of the IDBI loan also goes against the grain. At three years, it is longer than other Indian bank borrowings in the second half of 2012, suggesting that appetite may be returning.

“While in the past 12 months, Indian bank borrowings have been quite low, a pick-up is expected as evident in recent transactions for Bank of India, Indian Overseas Bank and Yes Bank,” said Ashish Sharma, director, loan syndications for Asia-Pacific at Bank of America Merrill Lynch.

“Liquidity remains tight, but is improving and will be available in shorter tenors of three years or lower,” Sharma added.

Although this is an encouraging sign, Indian banks still have to reckon with a reduced investor base. Taiwanese lenders, hitherto known for their voracious appetite for India exposure, are shunning the country.

Mega International Commercial Bank is the only Taiwanese lender to participate in an Indian bank deal this year. It is unclear if Mega committed US$25m or US$50m, but that is a far cry from the response from Taiwan in previous years.

“Since S&P lowered its outlook on India, we have been asked to monitor the situation and not to join Indian deals,” a banker from the overseas banking unit of a commercial bank in Taiwan told IFR.

Thankfully, European lenders are making a comeback, as seen on the recent deals for Yes Bank, BoI and IDBI.

The rising pricing is also attracting another long-forgotten investor base – the Middle East. Bank Muscat, Doha Bank and National Bank of Abu Dhabi have figured in recent Indian bank deals, as MLAs and bookrunners, in some case,, to make up for the lost liquidity from Taiwan.

“It’s all about pricing and tenor. Middle Eastern banks used to be active during the pre-2004 days when Indian loan volumes were thin, pricing was north of 100bp over Libor and maturities short. That was the return hurdle at the time for many banks from the Gulf countries,” said a loan syndicator at a foreign bank in Hong Kong.

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