Tuesday, 25 September 2018

India 2005 - Downward Ho!

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Pricing on Indian loans has dropped precipitously over the past couple of years as a result of the rising liquidity provided by a rapidly expanding universe of lenders. With India’s economy powering ahead the number of offshore banks rushing to lend can only get bigger and the all-in yields ever lower. The country’s banks have benefited the most. Prakash Chakravarti reports.

Indian borrowers have been flocking to the loan markets in hordes ever since offshore borrowing took off in a meaningful way in early 2003, and this year has been the busiest ever. By the first week of August, Indian loan volume was about to cross the US$6bn mark for the year.

Despite the seemingly never-ending supply of Indian loans, pricing compression has not eased and is grinding in tighter on each new deal that comes to the market, with recent bank deals providing stark evidence of the trend.

State Bank of India (SBI) has returned to the loan markets twice since making its debut in May 2004 with a US$250m one-year loan, and recently raised another US$600m. On each occasion it set benchmarks not only for itself but also for other Indian credits that used SBI’s pricing levels to price their own borrowings.

SBI’s May 2004 one-year loan was mandated at 32bp over Libor. The one-year tranche of a US$250m one and three-year borrowing conducted on a club basis in September 2004 paid 32bp over Libor as well. However, more recently, in May 2005, SBI raised US$350m through a one and three-year self-arranged financing paying all-ins of 22bp over Libor for the one-year tranche and 35bp over Libor for the three-year.

The fact that the three-year tranche paid an all-in close to the one-year tranche on SBI’s previous borrowings less than half a year back demonstrates just how much pricing has dropped on Indian loans.

Meanwhile ICICI Bank, which can lay claim to the most frequent Indian borrower title, has tapped loans through its overseas branches in almost every tenor, except the four-year, in the one to five-year range and achieved ever tighter levels.

In May, ICICI tapped its first five-year loan paying an all-in of 70bp over Libor, while in August it completed a US$50m one-year club that paid an all-in of 25bp over Libor and a US$125m three-year loan that paid a top level all-in of around 40bp over Libor. At these levels, the loans came well inside ICICI Bank’s previous borrowings.

Pricing has not just dropped for bank names, but also for top-tier credits. Indian Oil Corp and Reliance Group entities are frequent borrowers that have achieved tighter pricing for their borrowings in the past couple of years thanks to an increase in the investor base that was a result of recent ratings upgrades for India.

Moreover, conditions are expected to become increasingly benign for borrowers as far as pricing goes. Despite India’s split investment grade ratings – Standard & Poor’s (S&P) still rates India as non-investment grade – there has been a good addition of new lenders to the universe of participants in Indian loans. That is only expected to expand further as S&P brings its ratings for India in line with the ratings by Moody’s and Fitch, both of which have already raised the country’s ratings to investment grade.

S&P’s upgrade of India’s sovereign ratings to BB+ – one notch short of investment grade – in February this year is expected to be followed by another upgrade next February. Most participants believe that S&P’s upgrade is a mere formality as the Indian economy grows from strength to strength. While most lenders have factored in the investment grade ratings, many in the market believe there are still a few players that are sitting on the fence waiting for S&P’s upgrade.

That would mean more good news for Indian borrowers and arrangers with participation increasing further. Already there has been the first participation in Indian loans by Japanese and Taiwanese lenders, but just how much lower the increased liquidity will push pricing down remains to be seen.

Pricing for bank names has perhaps reached resistance point given that it’s approaching the level where investment grade South Korean bank names borrow. “Given the ratings differential between the two countries, it is unlikely that pricing on Indian bank names will go down further,” said one banker in Singapore.

“However, top-tier Indian corporates could still see some room for pricing compression, which means that mid-tier credits that tap loans paying 100bp or more above the pricing of top-tier names will enjoy a good reception from the market.”

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