India Inc heads abroad in search of cheap funding

Indian Railway Finance Corp (IRFC) this month agreed to raise a $450 million loan from a consortium of banks at a spread of 300 basis points above six-month U.S. dollar Libor, the tightest since the collapse of Lehman Brothers last year.

State-run lender Rural Electrification Corp (REC) is negotiating with U.S.insurer Aflac Inc for a $200 million yen-denominated loan as part of the company's $500 million overseas borrowing plan.

Private sector lender Axis Bank, meanwhile, is looking to raise $300 million through a bond offer that would be the first overseas issue in a year from an Indian commercial bank.

Other firms, including State Bank of India, are said by market insiders to be considering raising debt abroad.

"Global appetite for Indian debt has improved, credit spreads have come in and deals are happening now," said Ajay Mahajan, managing director for financial markets and institutional banking at UBS in India.

He noted that Indian companies posted solid results in the most recent quarter, while the index of industrial production (IIP) averaged a robust 7.4 percent during July and August.

"It suggests the Indian economy has turned the corner and that should bode well for companies looking for debt capital as well as equity," Mahajan said.

The interbank cost of borrowing dollars, euros and sterling based on three-month Libor (London Interbank Offered Rate) is touching new lows as central banks and governments flood global financial markets with liquidity.

"There is a huge amount of risk appetite for India-specific papers," said Axis Bank's President of Treasury Bapi Munshi.

He said investors have scaled down their demand to a spread of below 300 basis points over Libor, from 325 bps in June when the bank started negotiating with investors.

"When it is around 250 or near 200, we will test the market. Appetite has improved compared to June and we expect spreads to narrow," Munshi said.