INDIA'S YELLOW BRICK ROAD
Asian banks' sudden passion for Indian debt paper may represent a flight to quality.
By Aaron Chaze

One bellwether of the romance with Indian company performance now currently sweeping Asia was the marked surge in interest by Chinese, Taiwanese, Malaysian and Thai banks for Indian debt paper in 2003.

Few analysts have tracked the flirtation, but bankers and Indian issuers took notice early on. "The interest first became obvious in the US$100 million short-tenure (one-year) syndicated loan issue from ICICI Bank in January 2003, which was oversubscribed 1.4 times," says Ravindra Kumar, executive vice president, corporate and investment banking for Credit Lyonnais in India. A US$75 million Indian Railway Finance Corporation (IRFC) syndicated loan issue followed a couple of months later, with Chinese, Malaysian and Taiwanese banks participating.

The trend reached its apogee in August with the fantastic response on the part of Asian banks to a US$100 million syndicated five-year loan from Tata Sons, the principal investment holding company of the 80-company strong Tata Group. The level of demand from Asian banks saw the Tata issue being oversubscribed twice leading to a remarkable level of pricing under the prevailing circumstances. The mandated size of the Tata Sons issue was US$75 million but bids for US$140 million were received. "We could retain a total of US$100 million including a green-shoe option of US$25 million, since we had permission from the Reserve Bank of India to raise only US$100 million. But we would have had no problem in absorbing the entire amount," says Phillie D Karkaria, vice president of Tata Financial Services (a division of Tata Sons). "

''Rarity Value"

South and East Asian banks lapped up nearly 40 percent of the issue. Banks based in the Middle East took about 25 percent, while European banks took up 30 percent. "We were very happy with the demand. There were 14 banks in all. There was a lot of interest from Chinese banks, but they could not actually participate, perhaps owing to their country limit restrictions, but they could be major participants the next time going by the level of interest expressed," says Karkaria.

The fact that the holding company from one of India's top-notch industrial groups was in the international loan market for the first time ever was a remarkable pull factor. Tata Sons is the funding arm of the Tata Group, one of India's premier industrial groups. Tata Consultancy Services, Asia's largest software exporter, is one of four divisions of Tata Sons. The Tata Group has an eclectic but successful group of businesses outside of software, which includes the world's largest integrated tea operation, the world's sixth-largest manufacturer of branded watches, India's largest private sector steel manufacturer, India's largest commercial vehicle manufacturer, and the country's largest chain of five-star hotels.

"There was rarity value in this deal. There is a lot of preference for the Tata name, even though Tata Sons would have similar default risk as any AAA-rated paper," said Madan Menon, director of Barclays Capital, lead arrangers for Tata Sons. Besides the oversubscription, the pricing was very competitive at 105 basis points above six-month LIBOR (all inclusive), when other Indian paper hitting the market at or around that time were selling for 130 to 140 basis points over LIBOR.

Lower Cost of Money

Tata Sons has moved quickly to exploit the lower cost of funding available in the cross-border syndicated debt market vis-`a-vis the Indian debt market. Reducing the cost of funds has been an on-going exercise at Tata Sons ever since domestic interest rates started declining sharply over the last two years. "The cross-border transaction reflected a shift in our funding tenor from short term to long term," says Karkaria. Tata Sons had rightly taken the view over the past two years that domestic interest rates would decline steadily. That prompted the move to short-tenor loans so that they need not lock into any particular rate and could keep reducing their cost of funds. The move now into issuing longer dated paper (the cross-border syndicated debt has a five-year bullet repayment) represents their current view on interest rates. "Our average cost of funds was 9 percent. With the repayment of rupee debt to domestic banks from resources raised through the syndicated loan, the savings on interest cost is significant at 500 basis points," says Karkaria.

So far, a total of US$1.5 billion to US$1.7 billion worth of Indian paper has been placed this year, representing a 50 percent growth of issuance over the previous year, making the response to the Tata deal even more remarkable. "During the April to May period hedging costs fell sharply in tandem with declining dollar interest rates, which led to a sharp rise in Indian companies raising money overseas," says Rakesh Garg, head of debt capital markets and risk advisory, HSBC. In addition the oversupply from Indian companies has led to an uptick in the spreads over LIBOR that Indian companies have had to pay. "On an average pricing had moved up by 30 to 40 basis points over the past year as a result of increased demand for external commercial borrowings," says Kumar. Besides, the international loan market was aware that there were more loan issues from other triple-A rated Indian companies in the pipeline at the time the Tata Sons issue hit the market.

But even Indian debt issues other than Tata Sons have seen an increased exposure from Chinese and Taiwanese banks. "The shift in the trend of participation by co-lead arrangers and participatory banks is basically Asian banks replacing European banks. These banks were mainly German and Italian banks, who were the mainstay of Indian debt issues and are now conspicuous by their absence," says Abhay Rangnekar, director and country head for ANZ Capital in India. "From previous levels the appetite of European banks has dropped by half, especially from German banks such as RZB, Dresdner etc," he adds.

The US$100 million loan syndication by Indian Petrochemicals Corporation (IPCL), which was successfully arranged by ANZ Capital in July 2003, was marked by a complete absence of European and American banks. The issue was oversubscribed by a number of Southeast Asian banks such as Bumiputra Commerce (Malaysia); Middle Eastern banks such as Emirates Bank and National Bank of Kuwait; and Mizuho of Japan, which is rapidly becoming a significant participatory bank for syndications originating from India. More recently, the US$100 million Hindustan Zinc issue, which closed in October 2003 saw new takers emerge such as Krungthai of Thailand, further increasing the depth of participatory banks in Indian paper. Some Chinese and Taiwanese banks are becoming familiar names such as China Trust Commercial Bank, Exim Bank of China and the First Commercial Bank, Taiwan. "Nearly one-third of Indian issues are now taken by these banks, largely Chinese, Taiwanese, and Malaysian banks," says Kumar.

The reason for such unprecedented demand for Indian paper from Asian banks is not hard to glean. "India has had an excellent and impeccable track record in the international debt market and Asian banks in particular are comfortable with the risk/reward ratio on offer," says Rangnekar. "India has been gaining recognition internationally for its economic growth and stability. Secondly, there is a recognition that the Indian banking and financial system is more sound than most others in Asia, thus creating a robust outlook for Indian companies," says Kumar.

This is clearly a sustainable trend, especially keeping in mind the appetite of the Asian banks. Currently despite the large chunks of Indian debt paper being lapped up by these banks, the overall exposure (in context of the Chinese and other banks' assets) is quite small but it will rise. "This demand for Indian paper will continue from Chinese banks and other regional banks until they hit their country limit. Essentially there is a dearth of good-quality paper for Chinese and other regional banks. The demand for Indian paper represents a flight to quality," points out Kumar.

CFOs are Pleased

And Indian CFOs are happy to oblige. There has been a gradual realization among Indian CFOs that it is important to broad-base the profile of lenders and that holding some portion of debt in foreign currency can be judicious. Also, the negative forward premium on the rupee has further narrowed the net cost of borrowing in foreign currency for Indian companies, making foreign currency borrowing not only lucrative but also almost risk free. "We did the cross- border transaction partly to reduce our cost of funds but also to substantially diversify our base of lenders. Diversification also makes funds cheaper to access for good companies," says Karkaria.

Aaron Chaze is a freelance writer based in Mumbai.