It's no rush-hour for ECBs
The 50 bps cut in interest rate by US Fed has already made quite an impact on the stock and money markets.
By George Smith Alexander, TNN |
MUMBAI: The cut in US Fed rate is unlikely to trigger a rush for foreign currency loans among corporates, as restrictions on overseas borrowing placed by the Reserve Bank of India have not been diluted. In fact, the central bank is seen to be going slow on processing applications for overseas loans.
However, the Fed move would widen the difference between overseas borrowing costs and the local borrowing. Most corporates, which have been borrowers in the overseas market, would be major beneficiaries. However, for corporates, which are looking at acquisitions, there is unlikely to be much of a difference as investors are still looking for only quality investments on the back of the subprime crisis.
If bankers are to be believed, RBI, over the past few weeks, has not been actively processing loans and foreign currency convertible bond programmes of Indian corporates. In most cases, loans have been delayed by over a month, according to a senior foreign banker.
However, for corporates, which are looking at raising money from the overseas market, the difference between local and overseas rates on a fully hedged basis is over 175 basis points. The borrowing cost for a AAA corporate in the local markets would be 9.8% for five years.
In most cases, corporates have not hedged or have hedged their dollar liabilities, betting on a further weakening of the dollar. According to bankers, corporates have swapped only one-thirds of their overseas liabilities. Others who have not swapped would also gain by the weakening US Libor, as the interest gets resets on a six-month to one-month basis depending on the contract. The six-month US Libor now is at 5.06% against around 5.38% before the Fed rate cut. However, bankers pointed that many corporates, which have ambitious projects, will go for overseas borrowing because of the huge cost differential.
“The aggressive Fed rate cut and the action by the UK chancellor on Northern Rock will provide the much-needed comfort to international credit and money market. Back home, the appetite and the price for Indian paper will improve, if the actions have the desired effects of improving conditions in the credit market. Further, expectations of a US rate cut, another 50 bps in the remainder of the year, and a bullish rupee could tilt the economics in favour of foreign currency funding,” said StanChart MD global corporate sales-South Asia Hemant Mishr.
For overseas M&As, corporates, according to bankers, will have to get accustomed with higher costs of borrowings. Overseas banks are sitting on loans of over $400 billion. These need to be sold down before the appetite for loans come back to normalcy. However, Indian banks and foreign banks which have presence in the country are willing to support Indian corporates’ acquisition plans.
“The subprime issues revolve around the market participant confidence which has an impact on short-term liquidity. As marked to market positions are not yet fully disclosed, liquidity has seen a flight to quality. Despite this, in Asia, liquidity has held up better relative to other (global) markets, for high quality issuer with well-structured transactions,” said ABN Amro country head-corporate & investment bank Brijesh Mehra.
However, the Fed move would widen the difference between overseas borrowing costs and the local borrowing. Most corporates, which have been borrowers in the overseas market, would be major beneficiaries. However, for corporates, which are looking at acquisitions, there is unlikely to be much of a difference as investors are still looking for only quality investments on the back of the subprime crisis.
If bankers are to be believed, RBI, over the past few weeks, has not been actively processing loans and foreign currency convertible bond programmes of Indian corporates. In most cases, loans have been delayed by over a month, according to a senior foreign banker.
However, for corporates, which are looking at raising money from the overseas market, the difference between local and overseas rates on a fully hedged basis is over 175 basis points. The borrowing cost for a AAA corporate in the local markets would be 9.8% for five years.
In most cases, corporates have not hedged or have hedged their dollar liabilities, betting on a further weakening of the dollar. According to bankers, corporates have swapped only one-thirds of their overseas liabilities. Others who have not swapped would also gain by the weakening US Libor, as the interest gets resets on a six-month to one-month basis depending on the contract. The six-month US Libor now is at 5.06% against around 5.38% before the Fed rate cut. However, bankers pointed that many corporates, which have ambitious projects, will go for overseas borrowing because of the huge cost differential.
“The aggressive Fed rate cut and the action by the UK chancellor on Northern Rock will provide the much-needed comfort to international credit and money market. Back home, the appetite and the price for Indian paper will improve, if the actions have the desired effects of improving conditions in the credit market. Further, expectations of a US rate cut, another 50 bps in the remainder of the year, and a bullish rupee could tilt the economics in favour of foreign currency funding,” said StanChart MD global corporate sales-South Asia Hemant Mishr.
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For overseas M&As, corporates, according to bankers, will have to get accustomed with higher costs of borrowings. Overseas banks are sitting on loans of over $400 billion. These need to be sold down before the appetite for loans come back to normalcy. However, Indian banks and foreign banks which have presence in the country are willing to support Indian corporates’ acquisition plans.
“The subprime issues revolve around the market participant confidence which has an impact on short-term liquidity. As marked to market positions are not yet fully disclosed, liquidity has seen a flight to quality. Despite this, in Asia, liquidity has held up better relative to other (global) markets, for high quality issuer with well-structured transactions,” said ABN Amro country head-corporate & investment bank Brijesh Mehra.
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