Investment bankers are advising Indian corporations to put on hold their plans to enter the overseas market to raise money till the ripples over the US subprime mortgage meltdown subside. Delinquencies are on the rise in the US mortgage market after lenders aggressively pursued subprime (or risky) lending. Most banks that operate in the international bond market are now facing the heat, as many of their products have exposure to such subprime assets.
At least 12 Indian corporations are now in the overseas bond market trying to raise approximately $6-7 billion (Rs24,240-28,280 crore) through bond issues that will mature in five to seven years. Bankers are advising those companies to put off these issues till the market calms down. “Unless a firm is in urgent need for capital, we are telling them to hold on. There is nothing wrong with the credit risk of Indian firms but it’s the sentiment that has changed,” said Singapore-based Raju Shukla, managing director and head of investment banking, India, at Barclays Bank, a large player in the overseas debt market.
Ravi Kapoor, who advises clients on international bond issuances at Citigroup Global Markets India Pvt. Ltd, said it is a bad time for a company to raise money from the overseas markets. “Companies should delay any plans to raise money through overseas equity or bond issues. There is no certainty in this market. It is advisable to wait and watch till there is some stability in the market,” he added.
Some of the firms that have already started the process may end up having to pay a little extra to pull their debt issues. The impact of the subprime crisis on the bond market, however, is sharper than that on the syndicated loan market. “It is almost business as usual in the syndicated loan market but the bond issuers may have to pay a little more,” said Kalpesh Kikani, global head of investment banking, ICICI Bank Ltd.
This is because financial institutions are the main investors in the syndicated loan market and they are aware of companies’ credit risks. In contrast, funds invest in the bond market and trade in corporate paper. So whenever there is a panic in the market, they react adversely. According to Kikani, Indian firms trying to raise money in the high-yield junk bond market too will find the going tough.
Bhushan Steel and Scrips Ltd, a mid-sized Indian steel company, is currently in the international market to raise $100 million through a six-year syndicated loan. According to investment banking sources, investors are demanding an interest rate of 214 basis points over Libor, the benchmark rate. Jindal Stainless Ltd, too, may have to pay higher rate for its $200 million loan. Libor or London inter-bank offered rate is among the most common benchmark interest rate used to compare short-term interest rates worldwide. The six-month Libor rate is now pegged at 5.33%.
Investment bankers are also testing the market to raise about $1.5 billion for the Tata Group to fund the acquisition of Corus Plc. Intially, banks offered the group a one-year bridge loan; now they are planning to raise a seven-year loan from the market to replace the short-term loan. Banks are also looking to raise a $900 million loan for Tata Power, once again to refinance a one-year bridge loan. “We are getting good commitments from various players,” said Shukla of Barclays. SBI, ICICI and Barclays are raising this money for the Tata group.
However, the head of bonds and treasury operations of a large American bank, who did not wish to be identified, said that Indian companies that had taken bridge loans from banks and are now looking to substitute them with long term debt, “will find it challenging”.
Credit rating agency Moody’s Investor Services Ltd, in a special comment released on Friday, said that it is in the process of assessing how risk aversion in the subprime and structured credit markets has impacted the leveraged loan market. It mentioned that Asian banks are not likely to be impacted because their structured products have little or no exposure to the US subprime mortgage assets.
Sangameswaran Manikkan, executive director at ABN Amro Corporate Finance (India) Ltd is not worried about the syndication of loans even though the institutional investors, he said, might ask for a higher rate of interest on them.
Sandeep Bhandari, regional head, global markets, south Asia, at Standard Chartered Bank, said that there is too much pessimism among his peers. “If you look at acquisition financing, the requirement of Indian corporations is between $100-500 million—very small compared with global corporations. Though the subprime woes have made the credit markets jittery, there is enough headroom for Indian companies to raise such amounts even now.”