One-way street

IFR India Special Report 2013
6 min read

After a cautious 2013, renewed risk appetite is driving down offshore loan pricing and luring more Indian borrowers to the international markets.

Offshore loan volumes from India are rebounding as positive sentiment among foreign investors allows borrowers to push for lower pricing.

The momentum generated following the installation of a new government led by pro-business Prime Minister Narendra Modi spells great promise for the Indian economy and the business environment as a whole.

India Inc is enjoying better equity valuations, with the Bombay Stock Exchange Sensex index regularly testing all-time highs, and foreign bond investors have warmed to US$15.52bn of international new issues so far this year, with the pace accelerating since Modi’s victory.

It is a familiar story in the world of loans, too. India-focussed loan bankers have been kept occupied for the best part of the year and the pipeline of deals continues to bulge.

“Pricing for top-tier Indian borrowers will continue to grind lower. Lenders expecting a greater yield would have to either move down the credit curve or look at structured transactions, which in turn would give a fillip to dealflow from the second and mid-tier credits.”

For the first three quarters of 2014, offshore loan volumes were already at US$17.5bn from 46 deals compared with US$24.98bn from 91 transactions in all of 2013. Judging by the run rate and the deals in the market currently, 2014 is already within touching distance of the US$28.87bn raised from 78 deals in 2007, an all-time record.

That is a remarkable turnaround for an economy that was in the doldrums for the last couple of years with the Indian rupee plummeting to historic lows of Rs68 to the US dollar in late August last year. At the time, all signs pointed to a difficult environment for Indian borrowers as lenders shied away from taking exposure amid a deteriorating macroeconomic environment.

Even amid the confidence crisis, a sustained rise in pricing for Indian transactions did not materialise. Liquidity among foreign lenders, particularly the Taiwanese banks, has ebbed and flowed. Regulatory scrutiny of Chinese exposures in the early part of this year led banks in north Asia to hunt for assets and yield in other parts of the region, thus benefiting Indian and Indonesian borrowers.

That, combined with the positive sentiment for the Indian economy following the elections in May, has restored the appeal of Indian credits for offshore lenders amid expectations of a resultant rise in loan market activity.

“We expect [offshore loan] volumes to pick up in 2015 on the back of the positive economic and political environment,” said Birendra Baid, head of loans origination for Asia (ex-Japan, ex-Australasia) at Deutsche Bank.

“Among the major contributors to the rise in volumes would be the restarting of capex cycle, which was stalled for the past few years. M&A activity and related financings should also see a boost as there is a lot of interest in India from financial sponsors,” he added.

High-grade and state-owned borrowers have dominated the action, with the Tata Group at the forefront. Since November last year, Tata entities have raised US$1.56bn with US$5.64bn more to be added to that tally with a deal in the market from Tata Steel.

Given the range of businesses in its stable, Tata Group is to a large degree representative of the Indian economy. Borrowers from the group raising money in the past year include companies in sectors such as automobiles, chemicals, communications, power and steel. All-in pricing on the loans for Tata entities ranges from 208bp to 324bp on recent deals.

Another closely watched credit is Reliance Industries, a frequent offshore borrower. Its telecom unit Reliance Jio Infocomm is in the last lap of syndication of a US$1.5bn dual-tranche loan that pays top-level all-ins of 155bp and 171bp, respectively, on the 5.5- and seven-year tranches (average lives of 5.25 and 6.5 years). Those levels are well inside the top-level all-ins of 218bp and 223bp the borrower paid on a like-sized loan signed in January 2011 that had tenors of five and 5.5 years (average life of five years).

Tata Group and Reliance are only two of the companies that have taken advantage of improving sentiment for India. State-owned oil and gas companies have also kept foreign lenders busy, amid clear signs that pricing is falling.

Between them, Indian Oil Corp, Hindustan Petroleum Corp and ONGC Videsh have raised slightly over US$9bn combined since the beginning of 2013. IOC best reflects the trend in pricing for Indian credits given the frequency with which it has borrowed.

Price talk on a C$600m (US$536m) five-year loan, IOC’s fourth loan in 2014, indicates a top-level all-in of 145bp – significantly tighter than the top-level all-in of 200bp it paid on a US$650m five-year borrowing completed in July (based on a margin of 180bp over Libor and a remaining average life of 4.92 years). In March, it sealed a US$500m three-year loan, paying a top-level all-in of 180.4bp, based on a margin of 138bp over Libor and an average life of 2.83 years.

It remains to be seen how lenders cope with the falling pricing on Indian loans amid an expected increase in activity.

“Pricing for top-tier Indian borrowers will continue to grind lower. Lenders expecting a greater yield would have to either move down the credit curve or look at structured transactions, which in turn would give a fillip to dealflow from the second and mid-tier credits,” added Baid.

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One-way street