Not In The Borrower’s Interest

Syndicated loan volumes in India fell to their lowest in three years as the high borrowing costs among Asia’s major economies made companies curb expansion and banks limit risks. Lending fell 52 per cent to the equivalent of $19.6 billion since 30 June from a year ago, the least since $18.3 billion in the same period of 2009, according to Bloomberg data. The average interest margin on dollar loans for Indian firms is 285 basis points (bps), 28 bps higher than for borrowers in the rest of Asia outside Japan.

The Reserve Bank of India (RBI) governor D. Subbarao this quarter cut his economic growth estimate to 5.8 per cent, the slowest since 2003, and urged local lenders to set aside record reserves as troubled credits double. Billionaire Gautam Adani’s Adani Power deferred 6,500 MW of capacity addition, while Sajjan Jindal’s JSW Energy delayed expansion of a 3,200 MW project in Maharashtra. “Entrepreneurs have cut back on investing, and hence borrowing, and on top of that M&A volumes have plunged,’’ said Birendra Baid, Asia head of loan syndication at Deutsche Bank, the sixth-largest arranger of foreign deals in India this year. “Until the policy environment improves, we’re not going to see a jump in loans.’’

Reliance Industries, which runs the world’s largest refinery complex, is paying a margin of 220 bps, or 2.2 percentage points, more than the London interbank offered rate on part of the $1.5 billion it borrowed for five years in September, show Bloomberg data. By contrast, PTT Exploration & Production, Thailand’s biggest publicly traded oil and gas explorer, paid a starting margin of 85 bps to finance the acquisition of Cove Energy. The margin eventually increases to 185 bps.
Reliance is rated Baa2, the second-lowest investment grade awarded by Moody’s Investors Service, and just one rank lower than PTT Exploration, at Baa1.

“Loan pricing in India rose faster than in other markets in Asia partly because some large Indian deals were pushed through at very tight pricing and these deals traded very poorly in the secondary market,’’ said Deutsche Bank’s Baid.

Some 66 loan transactions in all currencies have been signed since 30 June, versus 81 in the first half and 249 in all of 2011, data compiled by Bloomberg show. Foreign loans fell 61 per cent to $5.8 billion this half versus the same period of 2011 and local-currency lending is down 37 per cent to Rs 75,900 crore ($13.9 billion).

The RBI in October increased the cash buffer that local banks must set aside for restructured debt to 2.75 per cent from 2 per cent after a report showed 5.37 per cent of standard loans were being reworked as of June, up from 4.69 per cent in March.

Subbarao cut his growth forecast for the year through March from a previous estimate of 6.5 per cent. The central bank’s overnight lending rate, at 8 per cent, is the highest of the major economies in Asia. The new provisions were an “unpleasant surprise,’’ said K.R. Kamath, chairman of Punjab National Bank. State Bank of India, the country’s largest lender, will have to set aside over Rs 300 crore to comply, according to chairman Pratip Chaudhuri.

Mergers and acquisitions in India this half totalled $10 billion, from $22.7 billion in the first six months of the year. Tata Communications, controlled by India's biggest business group, had lined up acquisition financing of as much as $2 billion to help fund a possible bid for Cable & Wireless Worldwide, people familiar with the matter said in March. The Mumbai-based company was “unable to reach agreement with C&W on an offer price’’ and abandoned its plans, Tata Communications said on 19 April.

“Indian loan volumes have typically come off the back of cross-border acquisitions, as well as regular capital expansion funding,’’ said Atul Sodhi, head of Asia-Pacific loan syndication in Hong Kong at Credit Agricole. “With the global environment what it is, I can’t imagine many companies in India or anywhere else needing significant funds to expand.’’

The market share for lending by foreign banks in India is also shrinking. Four of the top 10 arrangers of loans year-to-date were international banks, down from five in 2009 and seven in 2007, according to Bloomberg data.

Syndicated financing in India has declined more sharply than in other markets around Asia. Hong Kong loans are up 25 per cent since 30 June compared with the same period of last year while bank borrowing in Singapore is down 44 per cent.

“From a very strong ‘momentum’ that prevailed until 2010, sentiment turned negative pretty quickly for India due to the policy and political environment,’’ said Deutsche Bank’s Baid. “Most Asian banks are able to raise money at substantially lower costs than what the Indian banks have to pay.’’

Allegations of corruption in the 2008 sale of mobile phone licenses and a government probe into allocation of coal mining contracts this year have roiled Prime Minister Manmohan Singh’s administration, with a political gridlock stalling legislation. About 102 bills are pending in Parliament, according to New Delhi-based PRS Legislative Research, a monitoring group. The session of parliament that ended on 7 September was the least productive in 17 months.

The yield premium on dollar bonds sold in Indonesia was 247 bps on 30 November versus a spread of 354 bps for notes in the US currency in India, JPMorgan Chase indexes show. Both nations are ranked Baa3 by Moody’s, the rating company’s lowest investment grade.

“During the financial crisis when balance sheet availability from foreign banks reduced, numerous local banks stepped up,’’ said Sameer Chandra, the Mumbai-based director of loan syndications at Citi India, a unit of Citigroup. “But this time, there will be a likely tightening of incremental approvals from many local banks, which have been experiencing a rise in restructured loan portfolios, and only a few global banks appear to have higher risk appetite.’’

Editor, Bloomberg News, Singapore, covers Asian

(This story was published in Businessworld Issue Dated 24-12-2012)