(Source: Joel Rebello Mint, New Delhi (MCT) — Seven months after IDBIBank Ltd became the first Indian company to borrow in yuan, bankers and analysts say more Indian companies are slowly warming up to the idea of raising money through the issue of dim sum bonds, which are listed in Singapore and Hong Kong.
A conference on the internationalization of the Chinese currency held last month in Mumbai saw treasury chiefs from some of India’s largest companies, including Tata Steel Ltd and Larsen and Toubro Ltd, banks such as State Bank of India, and even small and medium companies such as Ahmedabad-based KHS Machinery Pvt. Ltd, in attendance.
Only two other firms besides IDBI Bank have raised yuan bonds since the government allowed Indian firms to tap this growing source of finance in September 2011—ICICI Bank Ltd and ILandFS Financial Services Ltd.
The $234 million these three firms have collectively raised is a drop in the $42.2 billion (`2.34 trillion)—according to Capitaline data—ocean of foreign debt that Indian companies have on their books.
IDBI raised 650 million yuan for three years at 4.5% in November 2011, while ICICI raised 210 million yuan at 4.62% in March this year. ILandFS raised 630 million yuan at 5.75% in April.
The yuan is touted to become the next global currency due to China’s increasing economic size and its large international trade volume.
Though China has placed restrictions on capital flows that limit access to yuan-denominated assets, rising trade with China has forced companies to look at trade settlements in renminbi.
Increasing global uncertainties such as the threat of Greece’s exit from the euro zone and increasing deleveraging by European banks have increased the cost of borrowing for Indian companies abroad, forcing them to look at alternative markets.
Besides that, high liquidity, low interest rates and a rising investor appetite for Indian paper have made the yuan market a serious alternative to western financial centres.
Indian companies that want to diversify borrowings are taking a close look at dim sum bonds, said Hitendra Dave, head, global markets India, Hongkong and Shanghai Banking Corp. Ltd (HSBC), the sole adviser to IDBI’s issue.
“There are high-quality investors out there waiting to lap up the issues from India. We now have a pipeline of Indian companies waiting to tap this opportunity, especially companies which want to diversify their borrowings and those who have payments in China, for whom these borrowings would become a natural hedge,” Dave said.
He refused to name the companies, citing client confidentiality.
Dave said HSBC has about 35% of the dim sum market, twice the size of the next competitor and hence is well placed to service Indian companies. He anticipates more such bond offerings, particularly from Indian banks that have lending obligations overseas.
Banks are struggling with high demand for credit amid sluggish deposit growth in India. A 4 June report by Emkay Global Financial Services Ltd said credit growth has accelerated to 16.5-17% from 15.5% in February, in contrast with the slowdown in manufacturing and investment demand, because companies in India have shifted from foreign currency borrowings in developed markets to local borrowing.
In this situation, the bonds give Indian companies another option.
Besides being a diversification option for the bank, the dim sum bonds were 50 basis points (bps) cheaper than the rate prevailing in developed markets, after swapping the Chinese currency for dollars, said Melwyn Rego, executive director, IDBI Bank. A basis point is 0.01 percentage point.
“Another advantage was that unlike developed markets, where we have to raise $500 million minimum, these bonds allow you to raise a far (lower) amount which matches your asset profile. We had initially budgeted for 500 million renminbi (yuan), but looking at the demand, we raised a total of 650 million renminbi after getting demand for 1 billion renminbi. It totalled $102 million, which we could not have raised in developed markets,” Rego said.
It is this ease of issuance and flexibility that is attractive to Indian companies. Rego said it took IDBI just one week from filing the offer document to finally raising the money.
IDBI’s issue was a part of the bank’s $1.5 billion medium-term note programme (MTN). An MTN programme allows a bank to raise funds on an ongoing basis through different products such as floating-rate notes and fixed-rate bonds.
For ILandFS, the money was useful from an acquisition point of view after its toll-road operating arm ILandFS Transportation Networks (India) Ltd acquired a 49% stake in an infrastructure project in the south-western municipality of Chongqing from a Chinese state-owned enterprise for $160 million.
“The proceeds from the renminbi bond issuance have been used to refinance a part of the loan obtained for the above acquisition. Also, taking advantage of the then prevailing swap rates, the bond liability was swapped into US dollars, thereby reducing the pricing at US dollar level,” said Ramesh Bawa, managing director and chief executive officer, ILandFS Financial Services.
For ILandFS, a guarantee from Exim Bank of India also helped in lowering the cost by 175 bps below the then market rate.
Dim sum bonds will be a good option for Indian companies having operations inside China that require yuan funding or those seeking a cheaper source of dollar funds after swapping it with the Chinese currency, said Jonathan Horan, a Hong Kong-based solicitor with law firm Linklaters, which was involved in the ILandFS transaction.
“No Chinese regulatory approvals are required to raise RMB offshore funds. However, there may be approvals required if the funds are transferred into China,” Horan said. “Indian companies also need to consider domestic Indian regulations in relation to the transfer of offshore funds into India and also restrictions or approvals that may be required for certain transaction structures, such as the provision of guarantees from onshore Indian companies.”
Horan pointed out that 115 billion yuan of dim sum bonds were issued under approximately 130 offerings in 2011 globally.
“A similar volume is expected for 2012. A bulk of these issues have so far been from Chinese or Hong Kong-based companies. However, there have also been offerings by major non-Chinese corporates including Tesco, Caterpillar, McDonald’s, Ford Motor Co., ANZ Bank (first Australian issuer), Air Liquide (first French issuer) and América Móvil (first Latin American issuer),” he said.
Horan, however, said there could be challenges for Indian companies because bond sales by onshore India issuers may be denominated in yuan, but Reserve Bank of India (RBI) approval is required “and payments still need to be made in a freely convertible currency such as the US dollar”.
Because of the appreciation of the yuan relative to major currencies, especially the dollar, in the recent past, “borrowing an appreciating currency may not be worthwhile if the company doesn’t do frequent imports from China”, said Helen Qiao, managing director, Morgan Stanley Research.
Even in the current market environment and after swapping renminbi into dollars, Indian companies can save 50-100 bps on Western markets, Dave said. “There has been a lull in this market only because of the economic uncertainty, but there are people who are interested,” he said.
Since the money raised through dim sum bonds has to be used overseas, the level of the rupee doesn’t play a role.
Bawa of ILandFS said secondary market investors have supported the issue.
“The bond is listed on the Hong Kong exchange and has performed well in the secondary markets. The price of the company’s bond has risen since the time it was issued, giving credence to the investor interest in bonds and liquidity in that market,” Bawa said. With China keen to internationalize its currency, the yuan bond market is likely to keep growing, he said.
“It is a good option for issuers looking to optimize and diversify their liability base, and more particularly for companies having business interests in China,” Bawa said.
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