Home / Industry / Nomura sees India spurring secondary loan trade amid soured debt

Singapore: Nomura Holdings Inc. says secondary loan volumes from India could jump by as much as 40% as tensions in Europe prompt banks to offload souring debt.

Japan’s biggest securities firm says supply will come primarily from loans to mining companies as commodity prices slump. Indian dollar bonds declined 1.2% in June, their worst performance since August 2013, JPMorgan Chase and Co. indexes show.

Escalating credit risks stoked by Greece are spurring lenders globally to reassess their loan portfolios and take a closer look at riskier debt from emerging markets. In India, the percentage of soured and restructured loans will reach the highest since 2001 in the year through March 2016, Fitch Ratings Ltd’s local unit predicts, as corporates struggle amid a backlog of $212 billion stalled infrastructure projects and slowing exports.

“If a systematic event such as Greece percolates for some time, then we’ll likely see more urgency in banks selling stressed loans," Andrew Tan, Nomura’s Singapore-based head of secondary trading for loans and special situations in Asia ex-Japan, said. “We could see a rise in secondary loan volumes out of India by potentially even 30-40%."

Loans on offer

Jindal Steel and Power Ltd’s $400 million term loan surfaced in the secondary market in January, people familiar with the matter said. A facility of OCL Iron and Steel Ltd due November 2017 was offered in April at 95 cents on the dollar, a month before the miller said it was considering restructuring its business.

A portion of Adani Power Ltd’s $500 million loan due in 2018 came into the secondary market in April at 90 cents on the dollar versus 95 cents last year, other people familiar with the matter said. The Queensland government has some doubts over Adani’s capacity to see through its Carmichael coal mine project, located in the state, and has expressed concern about the group’s high level of debt, the Brisbane Times reported on 1 July.

London-listed miner Vedanta Resources Plc is an exception, with loans of the copper, aluminum and zinc explorer rallying ahead of a plan to merge its mining and oil units in India to simplify its business structure and save costs.

‘Need of the hour’

According to the Asia Pacific Loan Market Association, dollar-denominated facilities to companies including Reliance Communications Ltd, Reliance Industries Ltd, Bharti Airtel Ltd and Indian Railways Finance Corp. have also been offered in the secondary market this year.

“Creating an environment for investment in infrastructure is the need of the hour," said Shailendra Dhakadey, co-founder of Mumbai-based restructuring advisory firm Special Situation Advisors India Pvt. It’s one of Prime Minister Narendra Modi’s most important challenges and key to kick starting growth, he said, adding that “unless some urgent initiatives are taken, nonperforming assets will deteriorate."

Modi is grappling with a backlog of delayed projects totaling 13.5 trillion and, according to World Economic Forum (WEF) estimates, the country faces an urban infrastructure funding gap of about $80 billion to $110 billion.

International lending

Foreign-currency loans in India totalled $10.6 billion in the first half, 4.5% down on the last six months of 2014 and a 21% decrease from the same period a year ago, according to data compiled by Bloomberg. Banks have been slow to pass on rate cuts and the nation still has one of the region’s highest borrowing costs.

Nomura competes with the likes of Bank of America Corp., Deutsche Bank AG and HSBC Holdings Plc in the secondary loan market in Asia, the size of which isn’t reflected in any official data.

The situation in Greece could also raise offshore borrowing costs for local companies in the short term, Devendra Kumar Pant, the chief economist at India Ratings and Research Pvt, said in a report on 30 June. “Although Indian companies have limited direct exposure to Greece, they may feel some pain since a slew of them have been tapping international markets for cheaper funding relative to home country," he said.

The extra spread over Treasuries investors demand to hold Indian dollar bonds increased 5.5 basis points in June, the steepest monthly increase since March, JPMorgan indexes show.

“Companies in the resource sector are generally still out of favor at the moment with many of the traditional bank lenders paring back exposure in this space, not specific to India but across Asia and Australia," Tan said. Bloomberg

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