Wednesday, 19 September 2018

Local lenders turn back offshore tide

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India’s rupee loan markets are used to playing second fiddle to their offshore counterparts, especially when it comes to high-profile international acquisitions. But domestic lenders are catching up fast.

India’s rupee loan markets rose to the occasion as able substitutes for offshore liquidity in the aftermath of the global financial crisis. Offshore lenders have since returned in numbers, but the country’s domestic markets remains important sources of funding, especially for lower-rated borrowers and for infrastructure projects.

The international capital markets are the first port of call for any Indian company eyeing a major overseas acquisition. They offer the depth, breadth and volume essential for a successful execution of an overseas acquisition, and all in a low yield environment.

However, the rupee market is increasingly playing a role. Today, the rupee loan markets can deliver in size, pricing and, often, in a longer tenor than is available for an Indian borrower in the international markets. Increasingly, they are being seen as a complementary source of funding that borrowers can rely on for their financing needs.

The best example of this is the acquisition financing to back Bharti Airtel’s US$10.7bn takeover of Zain Africa. The debt backing the acquisition comprises a US$7.5bn offshore loan and a rupee financing for the equivalent of US$1.5bn-$2bn. A US$7.5bn financing in the offshore loan markets is already quite large and, had the rupee financing plan not been in place, it would have been more challenging for Bharti to fund the acquisition.

Although it might seem small in proportion to the total fundraising, the rupee loan also helped Bharti push for tighter pricing on the offshore loan.

The domestic market is gaining significance as a reliable source of capital for outbound M&A, but it is unlikely to shake its offshore counterpart off its pedestal any time soon.

“Over time, we expect that the rupee loan markets will account for a greater share of the acquisition consideration. However, we expect that the international markets will continue to dominate. Currently, the interest rate differential between rupee loans and US dollar loans is also a key factor that drives the preference for US dollar borrowing,” said Jaideep Khanna, head of investment banking, India, at Barclays Capital.

Bharti’s acquisition financing is a good example. Its US$7.5bn offshore loan is split into four amortising tranches, comprising tenors of three, four, five and six years. The facility pays a blended top- level all-in of 193bp Libor, based on a remaining average life of 4.4 years. With domestic interest rates in India at much higher levels, the rupee portion of the acquisition financing will likely pay a lot more.

While the onshore-offshore arbitrage dynamic plays out every so often with financings for Indian companies, the dice is loaded currently in favour of the offshore market. And that is unlikely to change anytime soon. Moreover, Indian lenders are restricted from lending to for onshore acquisitions as per Indian regulations. That means, presently, inbound M&A financings are still heavily reliant on the offshore loan markets.

Rupee lenders, however, often get the chance to participate in refinancings once an offshore acquisition loan needs to be repaid. Tata Group’s experience is a prime example. The group relied heavily on the offshore loan markets to fund its overseas expansion, but got caught in the headwinds of the global financial crisis and had to rely on domestic capital markets for refinancing.

In the process, it tapped the rupee loan market, which, not surprisingly, had a stronger appetite for the Tata name than foreign lenders in the aftermath of the global financial crisis.

Among the fundraisings was a Rs42bn (US$894m) domestic bond for Tata Motors, which was looking to refinance a US$3bn 12-month bridge backing its acquisitions of Jaguar and Land Rover in June 2008. The bond complemented equity and offshore loan market fundraisings and was crucial in restoring confidence of international lenders in the Tata Motors name.

The cost of funding on the bond was also quite competitive and it was possible because of a credit enhancement in the form of a standby letter of credit from State Bank of India. Ten other Indian lenders participated in the SBLC.

That SBLC provided an effective backstop for international lenders already experiencing fatigue on Tata paper. It was also a sign of things to come and the growing importance of the rupee debt markets, which appear to have come of age after having long been relegated to the sidelines by their more flashy and high-profile offshore counterparts.

Smaller tickets, bigger opportunities

While foreign lenders will most likely dominate the big-ticket M&A deals, a trend is emerging for Indian lenders to partake in acquisition financings for second and mid-tier Indian corporates. Foreign banks’ balance sheets are still severely constricted after the crisis and many of these companies would not be bankable names and, therefore, would not pass muster with the credit committees of the foreign banks.

Indian lenders, on the other hand, have a better understanding of - and stronger risk appetite for - these credits and will not be reticent to lend even in M&A situations. In recent times, Indian lenders have stepped up to the plate where foreign rivals have been unable or reluctant to lend.

The levels at which these second- and mid-tier corporates can borrow in the offshore markets are much higher than the pricing top-tier Indian credits get away with. To that extent, it makes it more worthwhile for Indian lenders to support these lesser credits as they seem to pay better returns.

Indian healthcare services provider Fortis Healthcare tapped Axis Bank for a 12-month bridge financing backing its S$3.2bn (US$2.3bn) bid for Singapore-listed Parkway Holdings in late June. The Indian company was involved in a bidding war with Malaysian Government investment arm Khazanah Nasional before, eventually backing down.

However, Axis’s funding showed the rising clout Indian lenders enjoy with mid-tier Indian companies. Axis, along with other Indian lenders, had already proven in the past that Indian lenders could step up to provide acquisition financing to Indian borrowers where foreign lenders ran shy.

For instance, in June 2008, Axis sole arranged a US$1.1bn two-year bridge loan backing the acquisition of a 50% stake in Dutch power group InterGen by GMR Infrastructure. The bridge, paying an all-in north of 300bp over Libor, attracted commitments from four other Indian banks.

The same group of Indian lenders also backed GMR in its failed bids for Singapore’s Senoko Power and PowerSeraya in 2008 and 2009, as well as Ballarpur Industries’ failed bid for Malaysian paper and packaging maker Genting Sanyen Industrial Paper in February this year.

“We believe that, with the increasing presence and size of Indian banks’ offshore branches, their roles in cross-border M&A will increase. Over time, we expect Indian banks to play critical roles in all international M&A. However, for the time being, the higher cost of funding of most Indian banks, compared to the larger international banks, will ensure that both segments are required to financing any large M&A transactions,” added Khanna.

Projects drive record volumes

Meanwhile, the reverse is true for Indian project financings, where Indian lenders rule the roost and foreign lenders are only scratching at the surface.

In August, Deutsche Bank sole led a Rs10bn seven-year loan for GM India, a 50:50 joint venture between General Motors and China’s SAIC Motor. Deutsche sold down the loan completely to five other Indian banks.

At around the same time, RBS, along with IDBI Bank and SBI Capital Markets, led a Rs49.06bn 11-year project financing for Utkal Alumina International, a wholly owned subsidiary of India’s Hindalco Industries, which is setting up an alumina refinery in the eastern Indian state of Orissa. RBS ended up with Rs3.3bn on the deal, which attracted 25 other Indian lenders.

Much like the acquisition financings for second- and mid-tier Indian corporates, project financings in India are also largely the domain of Indian lenders.

“PF deals are not suited to foreign lenders because tenors are long and prepayments are not allowed,” said one banker in Mumbai.

The prolific PF activity in India has thrust the country’s lenders to the forefront of the league tables. Whereas a few years back Indian lenders hardly featured among the top 10 in the bookrunner league tables, the story has been completely opposite in recent years.

State Bank of India routinely tops the bookrunner league tables, not just in India, but in the wider region. In the first eight months of 2010, it had already notched up US$19.51bn in league table credit from 43 deals, building up an almost unassailable lead over second-placed Bank of Taiwan, which registered US$13.93bn from 38 transactions.

Indeed, five of the top 10 banks in the Asia Pacific (ex-Japan, including Australasia) bookrunner league tables are Indian.

And, of the US$43.93bn raised in 106 deals so far this year, US$40.39bn came from 88 rupee-denominated loans. (See Tables.)

Prakash Chakravarti

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