Rate hikes force India Inc to look beyond bank counters
Faced with competition in the face of interest rate hikes, cos are working overtime to keep their costs low.
By Preeti R Iyer & Sangita Mehta, TNN |
The steady northward movement of interest rates over the last 10 months or so has had corporate treasuries and finance managers work a little overtime.
The compelling need to remain competitive in the face of a rise of close to 250 basis points or 2.5% in interest rates during this phase has prompted them to work out strategies aimed at paring their interest expenses.
While large corporates are able to arm-twist banks into offering fine rates, mid-size and small corporates do not have such luck given their relatively weaker financial muscle. This segment is looking at ways to lower their interest burden with banks a little cagey in lending to them against the backdrop of tight liquidity and high demand for credit.
So, they have now hit upon commercial paper, bond issuance, currency swaps and furnishing a letter of comfort or guarantees as some of the options to squeeze out a better deal from reluctant bankers. “There is also external commercial borrowings (ECBs) and quasi-debt instruments such as foreign currency convertible bonds (FCCBs) to choose from,” said YES Bank president (corporate finance and development banking) Somak Ghosh.
Bankers said some corporates are now seeking to raise short-term money in the form of commercial paper (CP) instead of drawing on short-term working capital from their banks. This is owing to the fact that interest differential between drawing a pure loan and a CP is close to 200 basis.
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Recent RBI data shows that investments by banks rose at just around the time that local interest rates started inching up. Investment in CPs aggregated Rs 2,611 crore between April-December 2006, while during the same period a year ago they had pulled out Rs 288 crore.Although banks have not been active investors in bonds in the private placement market, Amfi data shows that money mobilised by mutual funds (basically through their income funds schemes) has shot up more than two fold since April. This indicates that corporates are raising resources from mutual funds in the form of subscription to their bond offerings. This may well be at a lower rate than pure loans.
However, when it comes to contracting term loans, getting a lower rate by playing one bank against other may no longer be easy. Yet, some corporates have managed to do this. They have managed to obtain a letter of comfort or a financial guarantee from their business partner, which helps them to shave off close to 200 basis points in interest expenses. For instance, a company can manage to do this by furnishing a letter of comfort from a big manufacturing firm to which it is a supplier.
But corporates who are unable to offer such comfort letters, have resorted to currency swaps. Some firms, for instance, are swapping their rupee borrowing to Japanese yen and Swiss franc. This has lowered their interest payout since it is linked to yen or franc over the London inter bank offered rate (Libor). Here, although the interest burden is reduced, the corporate is exposed to currency risk.
CPs still remain an all-time favourite for corporates, with mutual funds and banks being the primary subscribers. The upper-end mid-cap companies manage to raise CPs offering a yield of up to 9%, which is still lesser than the prime lending rate in the range of 11-12%,” said Development Credit Bank treasury head Harihar Krishnamurthy. This was reflected in recent deals where L&T Finance raised a total of Rs 310 crore through CPs since January 2006.
Although the company has enjoyed a ‘PR1’ credit rating since inception, there has been a significant yield differential of more than 200 basis points in the past one year. In November 2006, the company raised Rs 74 crore for a period of six months offering a yield of 8.45%. As against this, L&T Finance issued a fresh CP for raising Rs 70 crore in January 2007, but with a yield of 9.40%.
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