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Business News/ Companies / Indian firms tap global funds to cut debt, improve cash flow
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Indian firms tap global funds to cut debt, improve cash flow

Firms such as Bharti Airtel, Tata Steel and Reliance Industries have refinanced overseas loans this year at cost savings that range from 10-80 basis points

Koushik Chatterjee, group CFO, Tata Steel, said in August that the firm will save about 25 to 30 basis points on interest expenses at the end of its fund-raising exercise. Photo: Hemant Mishra/MintPremium
Koushik Chatterjee, group CFO, Tata Steel, said in August that the firm will save about 25 to 30 basis points on interest expenses at the end of its fund-raising exercise. Photo: Hemant Mishra/Mint

Mumbai: Indian companies are tapping global funding sources to replace expensive debt on their books, save on interest payments and improve cash flows by taking advantage of a drop in the cost of money and investor appetite for debt.

Bharti Airtel Ltd, Oil India Ltd (OIL), ONGC Videsh Ltd (OVL), Tata Steel Ltd, Reliance Industries Ltd, and Sesa Sterlite Ltd have all refinanced overseas loans this year at cost savings that range from 10-80 basis points. One basis point is one hundredth of a percentage point.

In the bargain, companies like Sesa Sterlite say they have saved as much as 460 crore, while others like Bharti Airtel and OIL have managed to refinance shorter-term loans taken for funding acquisitions with longer-duration borrowings via bond sales.

Most recently, Reliance Industries borrowed $1.5 billion from a group of overseas banks for its telecom unit Reliance Jio Infocomm Ltd, at a cost saving of 65 bps, according to a Mint analysis of loan data provided by Bloomberg. Reliance Industries declined to comment on the savings generated via the refinancing.

Indian issuers have been very active because of strong market appetite and low credit spreads, says Randhir Singh, managing director and India head of financing at Deutsche Bank AG.

“Credit spreads have come down by up to 150 basis points (bps) for some issuers in the last one year," said Singh, adding that recent developments including a sovereign rating outlook upgrade by Standard & Poor’s will mean that overseas fund raising by Indian companies will continue.

A Sesa Sterlite spokesperson, while confirming that the company had saved 460 crore by refinancing 20,000 crore in debt, added that it may look at more opportunistic refinancing to cut interest costs further.

Refinancing existing short-term loans with longer duration borrowings is also expected to help ease the pressure on corporate cash flows.

In April, OIL sold bonds in two bond portions of $500 million each maturing in 2019 and 2024, the proceeds of which will be used to refinance a bridge loan availed for overseas direct investment in a joint venture, the firm said in its sale prospectus. OVL, the foreign exploration arm of Oil and Natural Gas Corporation (ONGC), also made a similar arrangement in July.

In May, Bharti Airtel sold bonds in two tranches: a $1 billion senior notes issue maturing in 2024, and a €750 million senior bond issue maturing in 2021. In its sale prospectus, the telecom company said it intends to use substantially all of the net proceeds for repayment and refinancing of existing foreign currency debt.

Loan tenors are typically three-four years while bond tenors are 5-10 years.

“Longer tenors, specially in the case of refinancing of short-term bridge loans, effectively defers their liability and helps free up cash flows," said Chetan Joshi, head of debt capital markets at the Indian unit of HSBC Holdings Plc.

“Refinancing happening now is more opportunistic in nature since liquidity is good and sentiment towards India is extremely strong. Refinancing has happened both via the loan market and via the bond market, which typically also results in tenor extension," Joshi added.

External commercial borrowings out of India was $23 billion as of September, as per data from the Reserve Bank of India. But the data does not capture borrowings that have been routed via overseas subsidiaries. Fund raising via overseas bonds alone is expected to exceed $16 billion in the current fiscal year, said Singh.

At a macro level, the debt refinancing is one factor that may help Indian firms improve their credit quality metrics such as the interest coverage ratio, which is determined by dividing a company’s earnings before interest and tax of a certain period by its interest expenses of the same period.

As of 30 September the average interest coverage ratio of BSE 500 companies, excluding banks and financial institutions, was 3.74 times, lower than 4.08 times in the previous quarter.

An interest cover of less than 1 means that borrowers could struggle to meet interest costs and service debt. A higher ratio shows better credit quality.

Indian firms fare poorly in terms of credit quality when compared with other Asian peers. As per the International Monetary Fund’s global financial stability report released in October, Indian firms have the highest leverage (total debt to total equity) and lowest debt service capacity (Ebitda, or earnings before interest, tax, depreciation and amortization, to interest expense) among Asian nations.

Ebitda is an indicator of a firm’s operating profitability.

“For Indian firms even a percentage point reduction in interest rates is substantial and they are also expecting the interest rates may go up in the future when central banks change policies so they are taking the advantage right now," said Munesh Khanna, executive director, advisory-deals, at PricewaterhouseCoopers. Khanna added that low demand for credit globally had also spurred lenders and investors to increase their exposure to Indian firms.

Ashwin Ramarathinam in Mumbai contributed to this story.

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Published: 21 Nov 2014, 12:56 AM IST
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