Mumbai: Indian companies can no longer count on dollar credit as a cheap funding alternative to expensive domestic borrowings.
While surging interest rates at home had prompted many Indian companies to look offshore to raise dollars this year, risk-aversion among banks has pushed up the cost of offshore debt and made it scarce for all but the highest-rated borrowers.
As a result, small or mid-sized firms with repayments looming face the risk of default, while those in urgent need of cash may have little choice but expensive rupee debt, adding to their interest burden.
“Prices are higher, credit spreads are higher, so it is tougher to get dollars. Banks have an issue about liquidity,” said Harinder Singh, head of global markets for South Asia at UK-based Standard Chartered Bank.
The squeeze is most acute for firms looking to refinance existing debt. Still, Singh said, “everyone is in discussions to raise dollars.”
While globally companies are finding it harder to raise funds as investors sit on the sidelines and banks are in capital-preservation mode due to the European debt crisis, the dollar funding squeeze is especially painful for Indian companies given the high cost of local funding.
An Indian bluechip now pays about 9-11% interest on a dollar loan, still better than the 12-14% it would cost to borrow in rupees, but far more expensive than the 7-8% it would have cost a month or so ago.
“We are not in the market for long-term loans, but we are finding it difficult to raise even short-term funds for working capital,” said M.V.S Seshagiri Rao, joint managing director of JSW Steel, India’s No.3 steel producer.
Rao said that while the cost advantage of dollar borrowing has waned significantly, the company still prefers dollar loans as a hedge against its imports.
In October, state-run Hindustan Petroleum Corp Ltd raised $465 million for plant modernization and paid 165 basis points over LIBOR, said a senior executive who did not wish to be identified. Rates for a similar credit have risen to about 400 basis points over LIBOR since then, bankers said.
Indian companies, which have refrained from big investments in recent quarters as global and local economic conditions weakened, have relied on offshore sources to raise funds this year due to a poor stock market -- the benchmark is down 23% -- and high interest rates at home.
India’s main policy interest rate, at 8.5%, is at its highest since July 2008 after the central bank raised rates 13 times between March 2010 and this past October in a tightening cycle that is widely seen to be ending.
Slowing economic growth and high interest rates, meanwhile, are squeezing profits at Indian companies, making them less attractive to lenders.
Capital-hungry Indian firms are hoping the market picks up.
“Today, since the situation is tight, we are not even approaching banks,” said H.S. Bharana, chairman of construction firm Era Group, which has been looking to convert $100 million of rupee loans into cheaper US dollar loans.
Auto parts maker Amtek India, which plans to raise $250 million, is waiting for markets to become more favorable.
“We are watching overseas markets and believe that in the next six months we should borrow in dollars,” said Santosh Singhi, Amtek’s chief financial officer.
Liquor maker United Spirits, headed by flamboyant tycoon Vijay Mallya, who also controls ailing Kingfisher Airlines, recently said it had hired StanChart, DBS Bank and Rabobank to raise up to $225 million in offshore convertible bonds in early 2012 to cut high-cost debt.
Firms in India have raised $30 billion through external commercial borrowings in 2011, about a third higher than a year earlier, RBI data showed. Many of those borrowers are exposed to currency losses after the rupee lost nearly 20% of its value from a July peak to a record low earlier this month.
Brokerage SMC Global Securities has estimated provisions for mark-to-market losses on foreign exchange requirement for Indian firms at Rs27,000 crore ($5 billion), resulting in “disastrous December quarterly results.”
“Smaller companies will not get dollar funding and are in danger of default,” said Sunil Shirole, chief executive at Mumbai-based boutique investment bank Yen Capital Advisors. “They may be able to access the domestic debt market, but that will be very costly,” he said.
Shirole is working on two or three fundraising proposals including one for an energy company and another for an IT-services firm, which is looking to raise dollars to meet repayment obligations of its convertible bonds.
The Reserve Bank of India in its Financial Stability Report last week noted that foreign sources of lending are declining due to a rise in risk aversion and “tensions arising from Europe.”
Although rates have moved up, HPCL may still look for overseas funding in the near future as it enjoyed a 200 basis points discount to local borrowing, the executive said.
“The market is tough, but good bluechip names can still borrow in dollars. There are deals in the pipeline for the right kind of borrowers,” Standard Chartered’s Singh said.