India Inc heads abroad in search of cheap funding

GLOBAL BARGAIN-HUNTING

The cost of borrowing overseas is coming down significantly.

The five-year Reuters benchmark dollar-rupee currency swap , used by borrowers to price foreign debt-raising, trades at around 5.7 percent, 70 bps lower than the 6.4 percent in late June.

By comparison, a top-rated Indian company would pay about 8.5 percent to raise funds through rupee bonds.

Bankers say that after adding the hedging cost of buying a dollar-rupee forward contract, borrowing overseas costs about the same as it does locally, but is expected to become cheaper in the coming weeks.

Current rules allow each Indian company to raise up to $500 million during a financial year through foreign borrowings. A withholding tax of 20 percent is applicable on interest earned by investors in foreign borrowings of local companies.

Fund-raising plans of Indian firms, like other borrowers globally, suffered in the aftermath of Lehman's collapse, and the global credit crisis that followed triggered a spike in spreads linked to benchmarks like Libor and U.S. Treasuries.

Indian companies did not sell any bonds overseas during the three quarters through June, according to Thomson Reuters data. Issuance resumed this month, with Export-Import Bank of India's (Exim Bank) $150 million five-year issue the first.

Offshore loans are slowly returning after Indian companies raised just $2.8 billion this year through June. By comparison, they raised $15.4 billion in 2008 and $28.9 billion in 2007.

Most of the overseas borrowing in 2008/09 was completed before Lehman collapsed, strangling global credit markets.

While sentiment in the credit markets has improved from a year ago, analysts say that only top-rated firms can take advantage of falling rates.

"Conditions for debt issuance have improved from the severe credit freeze in the fall of 2008. However, they remain unfavorable to companies at the lowest rungs of the ratings ladder," Standard & Poor's said in a recent note.