Indian bond markets step up

If you set out to prove the decoupling hypothesis, the idea that Asian markets are now sufficiently distinct from the US and Europe to be insulated from the global financial crisis, you could do worse than starting with India. While at one point it looked as though the global recession would more than halve the 8.5% growth rate that India had averaged over the previous five years, the country now looks set to grow by as much 6%–6.5% this year and even faster in 2010, the effects of a severe drought notwithstanding. India’s resilience is largely attributable to a successful government stimulus package and monetary policy easing along with the ability of its local financial markets to fill the funding gap left by the near-closure of international markets in wake of the Lehman Brothers collapse. Despite this success, there are constraints on India sustaining such a strong growth rate – the lack of adequate infrastructure and the country’s famously Byzantine regulatory system are chief among these. Still these drawbacks should not blind anyone to the country’s achievements and the emergence of India’s domestic loan market is one such achievement. In recent years Indian borrowers have largely funded their international expansions through the offshore loan market, but with liquidity in this market drying up – and stringent prohibitive regulations governing it – activity has dwindled. By contrast, the rupee loan market has just kept expanding, thanks to local banks’ newfound willingness to underwrite quite large deals aggressively, particularly in the project finance space. The country has ambitious plans to spend US$500bn on infrastructure over the next five years and this should ensure the domestic loan market continues developing. The domestic-bond story has also been positive – this market has done well to turn itself into a viable alternative funding source for companies whose traditional funding avenues have been cut off. The rupee bond market’s prospects into the medium-term, however, are not as good as the rupee loan market’s prospects because of a limited investor base and tight regulations. Meanwhile, in the equity market, issuance has surged since the May 2009 election gave the ruling Congress Party a decisive majority, removing major question marks over the country’s political outlook. Issuance was minimal in the first five months of year and then, post-election, an avalanche of issuance, especially QIPs, hit the market. The pipeline is now bulging. Beyond issuance in primary markets, India’s entire financial sector is also expanding rapidly as growth in the asset management industry clearly demonstrates. India’s investable wealth is forecast to grow from about US$250bn now to US$1trn by 2012. The infrastructure to support this will grow accordingly, resulting in a plethora of new pension funds, insurers, mutual fund managers and the like. Joint ventures will be a major part of this as foreign players seek to participate in this growth. India is undergoing a stunning transformation and has made big strides towards turning itself into an open market economy. However, there is enormous scope to cut the huge amount of red tape involved in doing business in India and in easing the restrictive laws that govern the country’s capital markets. While India’s regulators might argue, with some justification, that their stringent regulation of capital market activity has shielded the country from the worst of the crisis, longer term these regulations will continue to be a brake on economic growth.

While this year’s growth will be lower than 2008’s 6.7% rise, it is expected to come in above earlier forecasts of as low as 4% as industrial output has increased significantly. “The impact of the recession has been far less severe than expected and the industrial and services sector are performing very well,” said Kevin Grice, an India economist at Capital Economics in London who forecast Asia’s third-largest economy would grow 6.5% this year and 7.5% in 2010. Like other economists, Grice said robust industrial production would offset losses from this year’s monsoon drought, which is expected to curtail rainfall by 13% from June-September, according to the Indian Meteorological Department. So far, rainfall is down 26% from normal levels although it has improved in recent weeks. In June, industrial production soared 7.8% – reversing a 16-month slump – showing that the economy was on a firm path to recovery. Economists expect production to remain robust in coming months, helping India’s US$1.2trn economy outperform all other Asian countries except China, which is forecast to grow 7%–8% in 2009. Factories aside, Grice said Indian reforms to curb the country’s reliance on agriculture output would help cushion the drought’s impact. Agriculture now accounts for 18% of GDP, compared with 25% a decade ago, he said. Falling rain Grice said the poor rainfall will trigger a 2% decline in farming output this year and knock 0.5%­–1% off headline GDP. Still, this is significantly better than in 2002 when a 19% drop in rain depressed GDP to 3.8%, its lowest performance in 11 years. Some economists were less optimistic, however. Deepak Lalwani, an investment director at Astaire Investments in London, said the drought could dent this year’s growth to 5%–5.5%. While he has a 6.1% GDP forecast, he said low rainfall could wipe as much as 4% off agricultural gains. Economists differ on the drought’s exact impact, but most agreed big gains in the industrial sector would offset agricultural losses. The state is not taking any chances, however. At the time of writing, the Indian government was rushing to avoid a crisis and announcing plans to raise farming subsidies by US$59m to provide more seeds to expand crops and boost market prices. The aid package is expected to total US$12.3bn this year, up 15% from 2008. Delhi will also maintain its rural aid initiative, through which it provides tax incentives, cash handouts, investment initiatives for key crops and rural employment programmes. As the global economy strengthens, exports are forecast to swing into positive territory by the end of 2009, economists said. They fell 31% to US$35.4bn in the first three months of fiscal 2009, which began in April and ends next March. Plummeting exports in 2008 caused 500,000 job losses across 10 industries. To boost exports, Delhi is rolling out aid programmes to help exporters find new markets as it strives to lower India’s dependence on trade with the US and Europe. Exports account for 25% of GDP, but this is expected to increase as India enters new markets and launches reforms to expand its low-cost manufacturing base (by introducing more flexible labour legislation) to take on China. According to Grice, India’s move to diversify its exports has helped foreign trade recover more quickly than in the rest of the region. Still, the country was years away from recovering the 20%–25% pre-recession export growth, he said. Economists have applauded Delhi’s stimulus package for working wonders on the economy, which expanded 6.7% in 2008 – an impressive feat even if it was the below the average 8.5% growth of the preceding five years. Under the initiative, which was more ambitious than many expected, the country announced it would spend Rs3trn (US$62bn), of which Rs200bn rupees would be new spending. The government lowered taxes and introduced a stimulatory fiscal policy, while the central bank cut interest rates six times to record low levels. The move has bolstered do

The Bombay Sensex has skyrocketed almost 51% this year, making it one of the world’s best performing markets. While the market hit a slight wobble on July 6, declining 5.8%, the day the Indian budget was released, equity deals have poured out of India and every issuer and banker is looking to make hay while the sun shines. According to Thomson Reuters’ data, US$8.8bn in equity issuance has been raised so far this year with most of it printing in the past three months. “A phenomenal amount of capital has been raised through GDRs and QIPs since the market opened up three months back. A lot of that money has gone towards de-leveraging, including much of the real estate paper that was raised,” said Ravi Kapoor, head of capital markets origination at Citigroup. “Investors are becoming discerning but are still willing to provide capital at the right price. There will be pockets and windows of opportunity. A lot of IPOs are getting lined up and there are a lot of unexecuted QIPs out there. The government is likely to embark on more aggressive disinvestment in second half of the financial year and that will drive issuance,” he said. Although most of the money raised so far has been through QIPs, there are signs that issuers are now shifting towards the IPO markets, which reopened with Adani Power’s Rs30.2bn (US$625.8m) IPO. The deal, which closed on July 31, was the first major IPO since Reliance Power’s IPO in 2008. Although the stock made a rather lacklustre debut on August 20, the deal provided momentum to the markets and on the back of that, National Hydroelectric Power Corp’s (NHPC) US$1.25bn float saw strong demand. NHPC was the first government divestment to hit the market in a long time and was a resounding success. When books closed on August 12, the deal was 23.5 times oversubscribed with the institutional book covered 30 times and the high-net-worth individual portion 57 times subscribed. NHPC’s success augurs well for the growing pipeline of state-run companies looking to tap the market, including Oil India’s US$500m–$600m float, set to launch in September. However, there are indications that the government is getting choosier about valuations following Adani Power’s IPO success. Generally speaking, however, government divestments are expected to be sensibly priced and well-received by investors. “There is appetite for reasonably priced Indian paper, especially the likes of NHPC because overall the direction of the market is positive, with growth in the economy, as demonstrated by corporate earnings in Q1. There is a fair bit of investor bias towards India among various economies given the positive momentum in the economy,” said Dilip Kadambi, head of ECM at RBS, India. Although, the finance minister released few details on government divestments during the budget, there has been growing noise about state-run companies like NMDC, Rural Electrification Corp and Power Grid looking to tap the market, though the exact format – whether through a follow-on public offer or QIP has not yet been determined. The finance minister has proposed increasing the amount of state-owned companies that can be listed to 25%. Looking forward, equity issuance is likely to be driven by a mixture of QIPs and IPOs. Given the volatile market conditions, several QIPs have been held back due to floor price issues. “At every upward rally in the market, we will see a lot of QIPs that have been held up by floor prices, coming to the market to do trades. You will continue to see sensible IPOs getting priced and government divestments kicking off,” said Kadambi. Among the QIPs in the pipeline are deals for JSW Steel, Cipla, Tech Mahindra, and Axis Bank’s GDR-cum-QIP combo. Meanwhile, several power and real estate companies are lining up investment banks for their IPOs – including Indiabulls Power, JSW Energy, Sahara Prime City (north of US$500m), Lodha Developers (US$500m) and Emaar MFG, which pulled its earlier US$1.6bn IPO in 2008. Given the importance o

The pension market, while now very small, is expected to grow, while financial asset management is expected to rise from US$83bn to US$520bn by 2012. Despite pending government reforms aimed at the pension market, the scope for foreign pension managers is still limited. But on the asset management side, the potential is vast. According to a new report released by an expert panel appointed by India’s national government, the pension market will grow to about US$84bn by 2025. A small portion of the working population is covered by the statutory benefit scheme, but there are voluntary schemes offered by life insurance and mutual fund companies. Demand for such voluntary schemes is stimulated by their tax benefits. India’s asset management industry is expected to record a compound annual growth rate of more than 20% from 2007 to 2013. While equity-linked savings schemes and equity funds are likely to record the highest growth, other market segments also hold tremendous growth opportunities. Due to the economic crisis, assets under management in India fell to about US$83bn at the end of March 2009 from more than US$92bn a year earlier. In May 2009 there was a sharp rise and assets under management were reported at US$134bn. The Boston Consulting Group now forecasts that assets under management could grow to US$520bn by 2015. More than 20 foreign asset management companies are considering entering the Indian funds market. India has nearly 80m elderly people and this segment of the population is growing by 3.8% a year. Most of these people are dependent on their savings and their children or other relatives because they are not covered by any formal retirement income scheme. Pension policies in India have traditionally been based on financing through employer and employee participation. As a result, only about 12% of the working population in India is covered by some type of a retirement plan and the vast majority has no access to retirement plans. There is a statutory pension scheme, which covers about 40m employees in organised sectors. There are other voluntary pension schemes available for the general public – offered by life insurance companies and mutual funds – but these schemes cover a tiny 1.6m of the population. The existing pension system leaves more than 88% of the Indian workforce uncovered. During the past few years there has been a marked shift in pension policy in India, which has culminated in the introduction of a New Pension System (NPS). Under the NPS, at the time of retirement there will be compulsory annuitisation of at least 40% of the accumulated pension wealth and there will be multiple pension fund managers licensed by the Pension Fund Regulatory and Development Authority (PFRDA) to manage the fund. An option that will be available is to transfer accumulations from one fund manager to another. A fixed return of 8% a year was given by the government on total pension contributions received from employees as well as the government’s matching contribution. Upon realising that returns could be in the range of 14%–29% a year if fund managers were engaged, the government appointed the State Bank of India, Life Insurance Corp and Unit Trust of India-AMC as pension fund managers. According to the government- commissioned report, the projected growth of pension funds would largely be due to normal economic growth rather than the significant increase in coverage that reforms in the pension and insurance sectors will produce. Asset management According to a McKinsey study, India offers many opportunities for asset managers. The asset management business is nascent, but has been growing 47% annually since 2003 and is forecast to grow at 33% a year over the next five years. The main drivers of this will be the retail segment, expected to grow at 36% annually, and the institutional investor segment, expected to grow at 29% annually. This would take assets under management to US$520bn by 2015, from US$92bn in 2008. Anthony

The past six months or so have seen a lot of CDR activity,” said Ashwani Puri, the Delhi-based leader of advisory services with PricewaterhouseCoopers (PwC). “It’s a mechanism which was used a lot after its introduction in 2003 and 2004, and was then seen quite rarely as the economy expanded. But it’s now becoming very active again.” The big question is how effective the CDR will prove to be at serving the interests of both lenders and borrowers. The idea is simple: in order to keep a company out of default, its creditors band together and agree to cut its debt, extend its repayment period or both. The company knows that if it can get a two-thirds majority of its lenders to agree to the terms of the restructuring, all of the others that signed up to the CDR process will be bound to the same terms – theoretically enabling it to deal with a huge amount of haggling and uncertainty in one fell swoop. In practice, it is rarely that straightforward. Even under a best-case scenario in which a company with a simple balance sheet and only 10 lenders would take at least four months to sort out, said Karan Singh, head of the banking and finance practice at Trilegal in Mumbai. A more complex case could be expected to last up to nine months. One of the key difficulties, which pharmaceutical company Wockhardt is highlighting, is that Indian companies often have debt from foreign lenders, who are not automatically covered by the CDR and have to opt in on a case-by-case basis. Trilegal’s Singh declines to go into detail (his firm is acting as an adviser in the restructuring), but provided an overview of the problems facing the company: “There is debt on the Indian balance sheet and debt on the offshore balance sheet of its international entities. A lot of that offshore debt was used in part to fund acquisitions, but some was also used for expansion at home in India. The problem is that you can’t factor the offshore debt into the local restructuring of the parent company because it’s on a different balance sheet.” As a result, he said Wockhardt’s senior secured US dollar lenders may have the same contractual rights as the company’s senior secured rupee lenders, but they don’t have the same statutory rights. The offshore lenders argue that they deserve to have recourse to the onshore balance sheet thanks to guarantees provided by the Indian parent company, but they may end up having to stand in line with unsecured creditors, he said. The problems are compounded by the company’s derivatives exposure – which is deeply in the red, but still fluctuating: “They don’t know how to mark it to market, so people are still grappling with the quantification of the total outstanding liability. It will be a while before basic issues are resolved and it’s ready to be restructured in full,” said Singh. The same divergent interests that are hampering agreement among Wockhardt’s lenders are common in other cases, too, said PwC’s Puri. Foreign lenders will often join CDR negotiations as observers, but rarely choose to be bound by the process because they usually make up a small portion of any company’s creditor group, and do not want to be locked into a restructuring agreement they do not like. As such, they are free to take enforcement action against a borrower separately. There have been some suggestions that the CDR could be extended to cover foreign lenders automatically, but Puri does not see much demand for it: “Over the past few years, Indian banks and the central bank have tried to bring the foreign lenders in. There have been discussions. But as a body, foreign banks are not comfortable with the process – they feel that Indian banks are willing to offer terms which they themselves would not.” Instead of extending the CDR, Trilegal’s Singh argued that there were other sources of inequity for foreign creditors which needed attention. He pointed to the fast-track process through which lenders can enforce their collateral rights if 75% of the group agree – a

Since the onset of the global crisis, volumes in foreign currency loans have plummeted significantly from the halcyon days of 2006 and 2007. Indian companies then were at the forefront making transformational acquisitions, which eventually led to big-ticket M&A financings, particularly in the offshore loan markets. But as the tide turned globally and liquidity dried up in international capital markets, one consequence has been a sharp fall in outbound M&A from India. In turn, financings have dried up and loan bankers focusing on this area have been left high and dry. One transaction promises to revive the Indian loan market and it is no surprise offshore lenders are piling into the deal. A US$2bn–$2.5bn loan is likely to emerge from the merger of India’s Bharti Airtel with South Africa’s MTN Group giving loan bankers a chance to earn some decent fees. Bankers are also looking for a ray of hope from an unlikely source of influence – the Reserve Bank of India (RBI). Offshore borrowings for Indian corporates have largely been dictated by the ebb and flow of guidelines from the RBI, which is tasked with regulating the capital flows into India. With that as its main objective, the RBI constantly tweaks and tinkers with the external commercial borrowings (ECB) guidelines that govern foreign currency loans by Indian corporates. Foreign lenders are praying that the RBI liberalises the ECB regime further to revive offshore lending by Indian corporates. After all, the RBI has played an instrumental role in increasing liquidity in the domestic debt markets, which have come to the rescue of Indian borrowers during the crisis when international capital markets remained largely shut. Market participants are clamouring for similar measures that will open the door wider for more activity in the offshore loan markets. Borrowers and lenders alike have always felt that the impediments to offshore borrowings are restrictions, relating to use of proceeds, interest rate caps and average maturities. To RBI’s credit it has done away with – albeit temporarily, until the end of the year – the interest rate caps that govern offshore borrowings. But loan bankers have more on their wish list – liberalising the use of proceeds and the average maturities. As always, the biggest impediment is the restriction on use of proceeds from offshore loans. Proceeds from offshore borrowings can be used only for capex or infrastructure projects, refinancing of foreign currency debt or overseas acquisitions. Proceeds from borrowings of US$20m or above are permitted only for foreign currency expenditure of specified end-uses. The funds cannot be remitted to India. Offshore borrowings of up to US$50m for rupee expenditure are allowed subject to RBI approval. Infrastructure sector borrowers enjoyed some exceptions as they were allowed US$100m for rupee expenditure subject to RBI approval. That limit was quintupled in September to US$500m in any financial year. Market participants believe that RBI should ease the restrictions on this front and allow borrowers to be the best judge of whether they want to borrow offshore or not. Likewise, the ECB regulations also restrict borrowers from tapping shorter than five-year tenors for loans above US$20m. Current rules prescribe borrowers to seek RBI approval if they intend to borrow above US$20m for a minimum average maturity of three years. “The RBI officials need to wake up to reality. Where is the liquidity in the longer tenor?” questioned one banker in Singapore, alluding to the fact that the average maturity requirements under the ECB rules were not in sync with current market dynamics. Indeed, foreign lenders have been very selective in providing funding to Indian credits and only the top-tier names have managed to squeeze anything out of the offshore loan markets. Those that get a favourable look-in are either government-linked companies or the bluest of blue chips. Transactions with tenors longer than three years have been f

India is on a roll due to its infrastructure development with several key petrochemical, power, road and telecom projects being conceived and delivered rapidly. The country has ambitious plans to spend US$500bn on its infrastructure in the five years to March 2012. There were concerns that funding problems would dent this growth but the projects found strong backing from the state-run banks. “The public sector banks sensed the opportunity and grew much faster and thanks to their adequate capitalisation, they could also offer their balance sheet to support huge transactions,’’ said a Mumbai-based banker. The state banks’ resilience was tested and proved when they sealed the US$3.189bn-equivalent financing for Tata Power and the Rs145bn (US$2.9bn) facility for Reliance Power earlier this year. Also, local banks’ ability to write blank cheques for projects was seen in the US$1.15bn-equivalent 13-year financing for National Aviation Company of India. Bookrunner IDBI put the facility in place in early August and 14 state lenders participated in the loan that will be used to buy 21 aircraft and related items. The rapid growth in infrastructure has translated into a huge opportunity for banks are now willing to underwrite deals aggressively. According to Thomson Reuters, the Indian domestic loan volumes year-to-date have been US$31.6bn--equivalent as against almost US$45bn–equivalent in 2008. Bankers reckon that the volumes will definitely cross last year’s numbers despite the depressed markets because a decent pipeline has developed from a stream of infrastructure projects conceived over the past two to three years along with ancillary financings also stemming from offshore acquisitions such as the Bharti-MTN deal. The impending merger of Bharti Airtel with South Africa’s MTN group is seen giving rise to a US$2bn–$2.5bn equivalent rupee loan opportunity to domestic market in addition to a US$3bn–$3.5bn offshore loan. But such transactions are rare so project financings will continue to be the catalyst for the growth. This year alone, project financings have contributed over half of total loan volumes. Here, Indian banks, especially the state-run banks, are better placed to provide long-tenor loans because of their competitive funding costs, but now even the foreign banks have started to participate in project loans, albeit in a different way. For instance, Deutsche Bank was mandated with IDBI and SBI Caps on the Sterlite Energy’s Rs55.7bn dual-tranche project loan to set up a 2,400MW power plant in July this year. Although the foreign bank did not commit any money, its presence indicated interest and the potential for foreign banks to play a role in domestic financings. Among the infrastructure deals, power and telecom sector deals have been in the limelight because of their size and the opportunities they afford foreign banks. These prospects will come by way of conversion of a portion of the rupee loan into foreign currency. How well foreign players will grab these opportunities will depend upon their funding abilities and how comfortable they can get with Indian borrowers. As cost of funds for most foreign banks and Indian private banks remain relatively high, it might remain a big constraint on their participation in the long-term local loans. However, going forward the landscape might change as even the rupee financings are becoming more competitive vis-à-vis the dollar fundraisings on a fully hedged basis. For instance, rupee funding that was hovering in the 12%–13% range until few months ago has now come down to 10%–11%. However, there is another problem that the banks might face and that is the credit exposure to a particular industry and a group. Banks are almost at their limits on their exposures to sectors such as power and some big industrial groups. Many are expecting the government to relax these limits, casewise, to help boost the projects. Foreign players might get to play an important role by stepping in to bridge t

The government now has the right people in the right positions,” says Anup Maheshwari, head of equities and corporate strategy at DSP Blackrock. “There’s ownership of infrastructure projects. There’s a commitment to deliver and to attract more foreign investment, so the days of political divergence are, hopefully, in the past.” Project financing is the mechanism the government hopes will facilitate India’s infrastructure growth. Of the US$500bn tabled, the central and state governments will provide US$350bn in a 37.2 % and 32.6% weighting, respectively,with the remaining 30.2% (US$150bn) expected to come from private investment. That’s the theory, but how realistic are these figures? Vinay Minon, executive director of equity capital at JPMorgan Mumbai, is cautiously optimistic. “I’m not completely sure if this US$500bn commitment can be fully realised. The government’s intent is positive, which is important, but the figures are high and if we are to achieve them, we need solid execution capabilities.” Total required debt financing has been estimated at Rs9.88trn (US$202bn), with Rs1.86trn in equity financing flowing into the private sector. But this still leaves two-thirds (US$100bn) to be raised as debt. How then, is India’s capital market responding? Equity growth augurs well Unsurprisingly, following the US$500bn stimulus package announcement, India’s stocks have been among the best performing emerging market equities in 2009. In early March the Sensex slumped to a three-year low of 8,160.40. However, by August 3, it had closed at a 14-month high of 15,924.23 – a staggering 95% rebound – while the NSE Nifty had reached 4,711.10 points. “We should see a fair bit of upside in the market, certainly compared with last year, but my belief is that the market will only begin to show signs of growth in the third quarter of 2010; that’s the real indicator,” said Minon. “I expect to see growth of 5%-5.7% GDP, down slightly because of the weak monsoon.” Infrastructure projects have increased demand for raw materials, especially steel, which posted a 5% increase last quarter as production rose to 12.8m tonnes. S K Roongta, chairman of Steel Authority of India, was quoted as saying “the company expects infrastructure spending to boost demand as much as 8% this financial year”. Bharti Airtel and Reliance Industries are top-ten-ranking stocks as telecom and power projects spring forth across the country. “We’re long-term bullish on equity performance: 10% annualised returns are expected for 2010, reaching 15% by 2012,” says Anup Maheshwari, whose TIGER fund, launched in 2004, is one of India’s largest infrastructure funds with US$680m of assets under management. ”All of which suggests India’s equity market has a lot of bottom-up potential.” Total investment by foreign institutional investors amounted to US$5.4bn during April-May, while more than US$199m was pumped in during the first week of June. These capital inflows need to continue for India’s infrastructure growth to be realised. Government ministers are travelling the world to attract overseas institutional investors, but it’s the likes of India Infrastructure Finance Corp (IIFCL) and Infrastructure Development Finance Co (IDFC) – government-backed special-purpose vehicles – that hold the key to making project finance a viable option. They operate by providing infrastructure companies with cheap, long-term debt, as well as assist India’s banks through takeout financing. This helps banks transfer existing loans off their balance sheets and ease the burden they’re under to finance such massive projects. With the imprimatur to raise capital through issuance of bonds, IIFCL had, as of March 2009, sanctioned Rs187.6bn for 107 infrastructure projects totalling an estimated Rs149bn. Ultra mega debt Some of the biggest projects are in road expansion and power generation. Some 30.5% (US$152bn) of the stimulus package goes to power generation, while 15.4% (US$77bn) will go on roads. In both s

Since AIG was bailed out just over a year ago, counterparty risk has been a burning issue. Without US$180bn in US government support, many of the insurer’s credit derivative counterparties would each have been left with losses that they could ill afford – potentially triggering further collapses. Markets are now trying to prevent a repeat by embracing central counterparties (CCP), which will sit in the middle of previously bilateral over-the-counter derivatives trades, to provide clearing and settlement services, while also guaranteeing that customers will be paid in full if their counterparty falls over. It is a good idea, but not a new one and although much of the current focus is on Europe and the US, Indian regulators have long been pushing the country’s markets to move in the same direction, the CCIL’s Shahabuddin said. “It’s not a new topic for us – the Reserve Bank of India decided eight years ago that they wanted a CCP for the nation’s securities markets – and other regulators are now coming to the same conclusion. They want a CCP to sit between these transactions, so that individual institutions don’t have to worry about counterparty risk, and the system as a whole is safer and stronger,” he said. CCIL was created in 2001 – a year after an influential report on payment and settlement systems recommended the move. The clearer’s non-executive chairman, R H Patil, was a member of the working group that produced that report. The clearer’s business to date has been mostly focused on cash bonds and currency clearing and settlement (it set a new daily record by clearing Rs330bn in government bonds on July 2), but in September it is ready to break new ground in Asia by becoming the first CCP to clear OTC derivatives transactions. “We know that Japan and Singapore have well-developed exchanges, but in terms of OTC settlement through a CCP, we are well ahead,” said Shahabuddin. The first product to be settled by CCIL will be the US dollar/rupee currency forward – a market with roughly US$900bn in outstanding trades. Shahabuddin estimated that around 30% of the market would switch to CCIL almost immediately, but that some lingering legal issues around customer defaults needed to be resolved before the business could really take off. Despite that, he said 80% of the market should be settled through CCIL in about six months. CCIL also expects to capture the same proportion of the market for rupee interest rate swaps – where there is around US$700bn outstanding among the bigger market participants. It is already mandatory for the big swaps dealers to use CCIL as a trade information repository, and full clearing and settlement services should be rolled out by the end of this year, said Shahabuddin. The choice of products says something about the nature of the CCP business – in order to offset the counterparty risk, CCPs charge initial and ongoing margin payments to their customers, and those payments are expected to provide the first line of defence should a default occur. As such, it is easier to take the risk in deep, liquid markets, which are well-understood and where margins can be calculated with more certainty. Shahabuddin said that with the exception of the dollar-rupee forward and the rupee interest rate swap, India’s OTC markets were too thin for a CCP to step in. But could this dynamic encourage CCIL to try to hoover up business elsewhere in the region’s fragmented markets, now that it has stolen a march on potential competitors? Some observers have speculated that the clearing business will evolve so that many products are cleared via regional hubs rather than by domestic players serving their domestic markets. Shahabuddin, however, played the possibility down: “Presently we’re only focusing on India and I think we’d have to examine the issue very carefully before venturing into any regional hub business. Personally, I don’t think we’ll get into that in the near future.” CCIL certainly has plenty to be focusing on for now

In mid-2008 Tata Motors embarked on the high-profile acquisition of Jaguar and Land Rover, catapulting it onto the big stage. At that time not many would have bet on the Indian company successfully financing the purchase, and achieving a refinancing, within 12 months. It got the ball rolling in June when it closed a US$3bn 12-month bridge loan backing its acquisition of Jaguar and Land Rover. The deal closed after a three-month syndication, with 23 lenders joining despite widespread scepticism about the wisdom of the acquisition. The US$1bn 18-month loan completed last month was the most challenging part of the refinancing exercise. To make it work the company tried every trick in the book. In November 2008 Ratan Tata, chairman of the Tata Group, urged senior executives in an email to hold back on acquisition plans (other than those deemed strategically critical) to conserve cash. He exhorted management to draw down on all loans from banks to the maximum extent possible, and to “expeditiously [finalise] pending loan and funding arrangements,” even if it involved higher costs of funding. The email underlined the urgency of the group’s funding requirements and the dire conditions in the global credit markets. “Some of our companies with substantial foreign operations or those which have made substantial acquisitions are already facing major problems in raising capital or establishing lines of credit for their operations,” said Tata. “In India also, many of our companies already are, or will soon face major problems in their access to credit, due to the lack of liquidity in the domestic market.” Depression in the stock market and a general ebbing of investor confidence, he warned, only added to the challenge facing the company. Since February 2000, when Tata Tea acquired the UK’s Tetley Group, until November 2008, Tata entities had raised US$25.5bn from the loan markets. The bulk of these borrowings have funded recent buyouts by Tata Steel, Tata Power, Tata Chemicals and Tata Motors. With loan markets already suffering from indigestion from the Tata name, any further offshore loan market taps looked foolhardy. By then Tata Motors had raised Rs41.5bn (US$881m) through a rights issue with the promoters – Tata Group – taking up 91% of the ordinary shares and 84% of the differential voting shares. Proceeds, along with certain divestments, refinanced US$1bn of the US$3bn bridge loan. In December, Tata Motors embarked on an investment deposit scheme targeted at retail investors, aiming to raise up to Rs27bn. It also entered discussions with offshore lenders for an up to US$1.2bn loan. Its chances looked precarious, especially in the context of the recent Lehman Brothers collapse. Unsurprisingly nothing materialised until, in early April 2009, it became clear that liquidity in the domestic bond markets was deeper than what was on offer in the offshore loan markets. Tata Motors adopted the strategy of raising as much from every source conceivable. A Rs13.6bn fundraising from a heavily collateralised ABS saw Tata Motors reopen the nascent Indian ABS market. It simultaneously kept discussions going with domestic bond market participants and offshore lenders. In early May the loan finally materialised, with the size around US$1bn-$1.2bn and a tenor of around 18 months (an average life of 15 months). Pricing was increased to 500bp throughout the tenor, instead of an originally planned 400bp in the first year and 500bp in the remaining life. The 21 banks joining the deal, two of which were first time lenders to the company, received fees of 150bp for an all-in of 620bp over Libor. By mid-May, Tata Motors was already putting together a Rs42bn domestic bond. It had an unusual structure, featuring a credit enhancement in the form of a standby letter of credit from State Bank of India that helped the Single A credit achieve pricing that a Triple A borrower would expect to pay. The multi-trance bond featured a low coupon of around 2%, with much of

In the capital markets, too, Hindalco has been quietly managing its funding requirements without much ado, although market conditions have been no less daunting at every step. In late June it completed an amendment to the US$1bn five-year term loan it had signed in November 2008. The amendment was completed in a market that has been tumultuous for loan markets, particularly for foreign lenders operating in Asia. The troubles and stresses these banks are undergoing in their home markets has put a heavy price on capital and a preference for lenders to use their balance sheet selectively for core clients. That it was able to obtain 100% consent from its lenders – although it needed only a two-thirds majority – is testimony to the group’s pull and its ability to keep lenders on its side. All the 11 lenders are foreign banks. Hindalco only paid a 50bp consent fee to lenders in return for a relaxation of its covenants relating to the gross debt-to-Ebitda ratio, which were set at 3.85 times. Under the step-down structure, Hindalco’s gross debt-to-Ebitda ratio should not exceed five times in the next 12–18 months. Hindalco is hoping to bring it down to 3.85 times during that timeframe. It is worth noting that Hindalco managed to sign the US$1bn loan in early November 2008 – just a few weeks after Lehman Brothers collapsed in mid-September that year. That loan was first talked about in mid-June 2008 when Hindalco considered its various funding options to refinance the US$3.1bn 18-month bridge loan signed in August 2007 that had funded its US$6bn acquisition of Canada’s Novelis. Simultaneously, Hindalco looked at options such as a global bond as well as a rights issue with differential voting shares (DVS). However, conditions in global bond markets were not conducive enough and offshore bond markets are not cost-effective for most Indian borrowers because withholding tax costs are quite prohibitive. Hindalco also scrapped plans for the rights issue with DVS as the regulatory regime for such an offering in India was untested. However, it maintained its plans to raise Rs50bn (US$1.04bn) through an ordinary rights issue, which opened on September 22 – the day commodity prices crashed in the global markets and a week after Lehman’s demise – and closed on October 10. Unsurprisingly, the promoters took up about 40% of the rights offering. Fortunately, Hindalco’s deal was underwritten – the first in the Indian equity markets in over a decade – resulting in the five bookrunners taking up around 34% to bring the subscription levels up to the 90% level required to close the offer. In the context of capital market activity elsewhere involving the other Indian acquirers such as the Tata Group, Hindalco’s exercises seem to have been quite smooth. For instance, Tata Motors raised a US$3.1bn bridge loan to fund its acquisition of Jaguar and Land Rover and subsequently tapped every conceivable avenue of financing to take out the bridge. (See Tata profile.) Hindalco’s loan in November 2008 and the subsequent amendment have cost the borrower well under what Tata Motors had to pay on its takeout. Hindalco’s November 2008 loan paid an all-in of 315bp over Libor, while the amendment exercise resulted in a mere 50bp fee. In comparison, Tata Motors’ US$1bn loan paid an all-in of 620bp over Libor. And the tenor on the latter’s loan is only 18 months (15 months average life) compared with the five-year tenor on Hindalco’s financing. One advantage for Hindalco has been that it is not as prolific a borrower in the loan markets as Tata Group entities have been in the past few years. Its US$3.1bn in August 2007 sparked off its recent borrowings in offshore loan markets, where it has managed to maintain its following among foreign lenders. Whether that remains the case in the future will depend on Hindalco’s ability to live up to its promises to lenders. “Hindalco Industries has done a commendable job in raising long term financing for its Novellis acquisition throu