Here is a spoiler for the dollar party of Indian companies
Indian companies have enjoyed the lowest cost of borrowings in a decade this year, with a sovereign rating upgrade coming as icing on the cake. The spread over the London Interbank Offered Rate (LIBOR) that investors demand to buy Indian bonds is around 170 basis points (bps), the lowest in 10 years. One basis point is one-hundredth of a percentage point. Of course, the LIBOR itself is also far lower than it was in 2007 or even five years ago.
No wonder Indian companies, according to a Bloomberg report, raised a record $15.2 billion through bonds during this calendar year.
Indeed, spreads have shrunk further after Moody’s Investors Service raised the sovereign rating of India in November. For instance, the credit default swap (CDS) rate for State Bank of India (SBI) has slipped around 20 bps while that for Reliance Industries Ltd (RIL) has dropped 30 bps since June. CDS rates indicate how a bond will be priced if the Indian firm chooses to launch an issue in the offshore market. Another indicator of investor friendliness towards Indian issuers are the bids that these companies received at their bond issuance this year. The $800 million bond sale of RIL was oversubscribed by about 1.5 times and other issuers such as ICICI Bank Ltd and SBI also received demand far greater than their issue size.
Here is where we pause for a breather.
Global interest rates have been on the rise over the past six months and will continue their climb as central banks across advanced economies continue tightening monetary policy. The US Federal Reserve’s latest rate hike is one among many such tightening measures. What does this mean for Indian companies?
Chart one shows the one-year LIBOR has risen by a sharp 40 basis points since June. Foreign currency loans and bonds are priced as a spread over the LIBOR. As interest rates continue to rise in 2018, this will soon start pinching hard even the best of Indian companies.
Another spoiler could be the cost of hedging. A gauge of cost of hedging is the Mumbai Interbank Offered Rate (MIFOR).
Chart two shows the one-year MIFOR hasn’t budged from its levels and has remained around 6.0-6.5%. But look at the profile of companies that raised dollars in 2017. India’s largest conglomerate RIL, largest public sector lender SBI and even largest private sector lender ICICI Bank Ltd all have dollar revenue. Dollar revenue makes it easier for companies to keep dollar borrowings unhedged as far as exchange rate risk is concerned. For the remaining issuers, the pinch from rising borrowing costs will hurt.
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