Amid declining overseas loan volumes, standby letters of credit have provided some welcome relief for Indian bankers in the past 12 months.
The South-East African nation of Mozambique may seem an unlikely setting for a ground-breaking shift in Indian financings. Two years ago, however, an oil-and-gas project in the Rovuma basin helped kick off a trend that has breathed new life into the offshore loan market.
Videocon Industries, better known as a consumer electronics maker, turned to credit enhancement in June 2012, when it obtained standby letters of credit amounting to US$2bn from Indian banks to fund its offshore capital expenditure plans in the oil-and-gas sector, including those arising from a 10% stake it owned in Rovuma, off the coast of Mozambique, and a stake in oil-and-gas fields in Brazil.
Videocon’s exercise was not necessarily innovative. SBLCs have long been a part of the world’s capital markets. However, Videocon’s deal became a path-setter few would have anticipated, providing a template for similarly rated or lesser credits from India to access international liquidity.
In the months that followed, a slew of borrowers from India, including state-owned Bharat Petroleum Corp, joined the party to raise some US$2.25bn from SBLC-backed loans.
“SBLCs and loans backed by these instruments are popular in times of tightening liquidity and market volatility as they provide wider market access, especially to non top-tier borrowers,” said Aditya Agarwal, head of loan markets, Asia Pacific, at RBS.
Indeed, the response to Videocon’s first SBLC-backed deal, mandated to Deutsche Bank, underscored the popularity of credit-enhanced deals. The US$200m deal came with a tenor of two years and 11 months, and was also the first of the credit-enhanced loans from India in 2012. When the facility did close in November, it had attracted 13 other banks and doubled in size to become one of the most successful syndicated loans of the year.
Following soon after was Bharat Petroleum, which closed a US$700m SBLC-backed financing of three and five years in early December. Bharat Petroleum was also raising funds to finance its capex requirements in the Rovuma basin as it also owns a 10% stake stake in that oil-and-gas field.
“Borrowing through an SBLC-backed financing usually has a positive impact on the credit ratings of such borrowers; resulting in a lower cost of funding for them, as well,” said Agarwal.
This is evident from Videocon’s SBLC-backed deal, which paid 350bp top-level all-in based on a margin of 300bp over Libor. More importantly, it helped Videocon raise much-needed funds and at a cheaper cost than would have been possible without an SBLC guarantee or credit enhancement.
The borrower’s last visit to the offshore loan markets was in April 2007, when it borrowed US$75m through a 3.4-year loan paying a top-level all-in of 119bp, based on a margin of 100bp over Libor. That deal was secured by account receivables.
While the pricing on that deal was tighter than Videocon’s SBLC-backed financing, it was transacted in a different era, when appetite for Indian paper was far stronger. SBLC-backed financings would have been the ideal funding instrument during and in the aftermath of the global financing crisis of 2008, but again appetite for FI risk was low.
“Between 2008 (after the global financial crisis) and 2010, demand for Indian credits was low among foreign lenders and offshore borrowings were also more expensive compared with domestic funding. As such, there was not much need for SBLC-backed financings for Indian borrowers,” said Birendra Baid, head of loans origination at Deutsche Bank.
Moreover, Indian banks were also not open to the idea of issuing SBLCs as the loans backed with these instruments competed with their own primary debt issuance, Agarwal pointed out.
“Until March 2012, Indian banks were raising bonds in maturities of five to seven years. It is a different case now as Indian banks are issuing bonds on tenors of 10 years or more whereas SBLC-backed financings are short-tenor borrowings with typically three-year maturities.”
The fact that Indian banks have not raised much money in the offshore syndicated loan markets means that the related investor base is also starved of exposure, making SBLC-backed financings more appealing.
For instance, Videocon’s SBLC-backed loan in November meant that participants earned 350bp all-in for what was effectively State Bank of India risk.
SBI has not borrowed in the syndicated loan markets since June 2011 when it raised US$460m in three-year money at an all-in of 105bp. The last truly syndicated loan for an FI name from India was last October, when Bank of India signed a US$200m two-year loan that paid a top-level all-in of 215bp. Like SBI, BoI is also state owned.
As the emerging-market turmoil continues, SBLC-backed financings are proving to be an ideal instrument for fundraising and lending.
However, the rule changes that the Reserve Bank of India announced in mid-August on overseas direct investments of Indian corporations threaten to curb outbound acquisitions, as well as related financings.
Under the rules, SBLC guarantees that Indian banks provide count towards overseas investment limits, now slashed to 100% of a company’s net worth, from 400%.
While the rules are intended to curb the outflow of capital from India, SBLC-backed financings will also slow down and some believe partial exemptions must be allowed.
“RBI could consider an exemption for SBLC-backed financings, as these help convert a funded ODI from an Indian corporation into an unfunded ODI, which helps the RBI’s objective to bring back capital to the country,” said Deutsche Bank’s Baid.
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