The other ECB

Late on a Friday night at the end of April, the Reserve Bank of India dropped a financial bombshell. After much lobbying from corporates, in one fell swoop it decided to simplify the country’s external commercial borrowing (ECB) guidelines.

“With a view to harmonising the extant provisions of foreign currency and rupee ECBs … it has been decided to stipulate a uniform all-in-cost ceiling of 450 basis points over the benchmark rate,” said the RBI in a statement.

Targeting specifically housing finance companies and port trusts, the new legislation introduced a flat all-in-cost ceiling, expanded the list of eligible borrowers – in short, made life easier for Indian corporates trying to raise money.

It was a move that was universally welcomed. “The simplification of external commercial borrowing guidelines has opened a new window of funding for home finance companies and port operators in India,” said Shikha Rai, corporate consultant partner at Mamta Binani & Associates in Pune, calling it a “welcome change”.

What had gone wrong? In short, the legislation had turned into Indian legislation.

“There was a need to simplify a process that had got out of hand,” explained George Cyriac, partner at Stephenson Harwood. The perennial (and inevitable) challenge with legislation in India is that over time it becomes more and more complex. As companies find workarounds for existing rules, you end up with incremental legislation and it becomes what one lawyer calls a game of Whac-A-Mole.

There was also a need to counter the contraction in domestic credit. Indian banks have simply not been lending and certainly not to the housing sector. Part of the reason was understandable. There had been a series of difficulties with non-performing loans to the sector and it was being treated over-cautiously. But the housing finance companies had few other options. They were technically allowed to borrow in foreign currency, but only after it had been approved by the RBI. And that had not happened for the previous two years.

Limited appetite for Masala

The obvious solution might appear to be the bond market but neither onshore nor offshore markets offered a useful solution. With bond coupons of around 11%–12% in the domestic market, the cost was a little rich for most housing companies, and Masala bonds were not much better.

The great financial hope over the past few years has been for Indian companies to sell bonds offshore but denominated in rupee. In theory it is a great idea, but it has never really taken off. The challenge is that it does not make great financial sense for the borrower.

“With issuers pricing swaps into the price of the bonds, the cost was simply too high,” said one banker. Along with other tweaks – such as rule changes that limited the tenor at which one could borrow and a cost cap at no more than 300bp above the RBI rate – no surprise that the market found itself limited.

With so many financial doors closed for housing companies, the new rules for ECB borrowing have been welcomed with open arms by issuers.

But Aditi Aparajita, senior associate at Norton Rose Fulbright, explains that there is more to the legislative changes than just streamlining a process that had become complicated. Of course “it is to allow companies to access funds overseas”, she said. But it also sends an underlying message of support for the housing sector. “The government is proactive in rule-setting, in trying to direct money. This is a way to encourage growth in the sector,” she added.

It is that social aspect of the legislation that should not be ignored. Keki Mistry, chief executive of Mumbai-based conglomerate Housing Development Finance Corp, is an unsurprisingly vocal cheerleader for the housing sector.

“All I can say is that the structural demand for housing in India will always remain strong and it is one of the sectors which will continue to grow for a long time,” he said in a recent interview. He sees little slowdown in demand over the next 10 to 15 years. Housing loan penetration remains extremely low in India at 2.5%, compared to 37% in the US, 34% in the UK and 23.7% in Germany, according to figures from the World Bank.

But the financial drivers behind the legislative changes are solid too. “This will diversify the borrowing mix by allowing international investors to participate in the high-potential affordable housing story in India,” said Rai. “It will definitely increase the overall prospects for a new round of overseas borrowings.”

And, so far at least, it is working. The RBI reported that Indian companies raised US$2.71bn through external commercial borrowing and rupee-denominated bonds in June this year, up by 66.3% over the same month last year. Of that, US$1.63bn came from ECBs, while year-to date they have raised more than US$2.66bn, which shows how much that has picked up.

Enthusiastic response

Housing finance companies have not so much dipped their toes in the water, rather then have jumped right in. In March, for example, private sector housing finance firm Indiabulls Housing Finance signed a US$200m five-year refinancing loan, through original mandated lead arrangers and bookrunners MUFG and State Bank of India together with Korea Development Bank. The loan pays an interest margin of 120bp over Libor and has an average life of 3.56 years.

After the new rules had been passed, Indiabulls was back in the market almost before the ink was dry, this time with a US$200m five-year loan that was upsized in mid-August to US$270m. ANZ, Barclays and MUFG were the original mandated lead arrangers and bookrunners of the bullet loan, while CTBC Bank and Sumitomo Mitsui Trust Bank came in with the same title. The deal pays a top-level all-in pricing of 167bp based on an interest margin of 145bp over Libor.

The pricing might be 24bp steeper than on the March transaction, but it makes sense for Indiabulls and it is considerably tighter than it might have expected either onshore or in the bond market.

The canary down the mine is HDFC; it is the group that everyone looks to. At the beginning of August, it launched a US$750m five-year loan. ANZ, Barclays, Citigroup, DBS Bank, First Abu Dhabi Bank, HSBC, Mizuho Bank, MUFG and Sumitomo Mitsui Banking Corp are the mandated lead arrangers and bookrunners of the bullet loan, which has been pre-funded by the nine leads. United Overseas Bank joined in senior syndication as MLAB.

The transaction pays an interest margin of 100bp over Libor and has an average life of 4.88 years. Lenders receive a top-level all-in pricing of 115bp and the MLA title for commitments of US$30m or more via a participation fee of 73bp, an all-in of 113bp and the lead arranger title for tickets of US$20m-$29m via a fee of 63bp, or an all-in of 111bp and the arranger title for less than US$19m via a fee of 54bp.

It is the benchmark for what housing companies can achieve and at those levels, little wonder that the market remains so active.

As well as housing finance companies other non-banking financial companies have been getting in on the act too. Shriram Transport Finance, which provides commercial vehicle financing services has come to the market twice and raised US$770m in the last couple of months. In July it signed a US$420m five-year senior loan. Deutsche Bank, First Abu Dhabi Bank, HSBC and StanChart were the lenders in that deal.

At the time of writing, it is in the market with a US$350m five-year loan. Deutsche Bank, HSBC, ICICI, Kotak Mahindra Bank and Standard Chartered are the mandated lead arrangers and bookrunners of the financing, which has a US$100m greenshoe option. The deal offers an interest margin of 140bp over Libor and has a remaining life of 4.83 years.

Umesh Revankar, managing director of Shriram Transport Finance, has been clear that the move has been about diversifying his base as well as locking in cheaper finance. “We aim to diversify our borrowing book,” he said emphasising his desire to reduce his dependence on the domestic credit market.

And in early August, as part of the bailout for struggling national airline Air India, the Civil Aviation Ministry confirmed that it was looking at ways to allow airlines raise to external commercial borrowing. It is an option that makes sense in a world of a declining rupee and rising fuel costs.

Many elements of the capital markets are cyclical. Those with longer memories recall the flurry of ECB activity in 2011 and 2012. But while the circle will inevitably turn at some point, few believe that there is going to be a slowdown any time soon.

Dealflow for banks such as Axis and ICICI has always remained stable, but newer ones such as Yes and Kotak have books to build which will drive a continuous flow of activity.

The clincher is that there is an election in India next year. With the saffron party not looking as invincible as it did after the 2014 elections, prime minister Narendra Modi is keen to defend his position. He wants to make sure that there are no scary prospects and sudden changes on the horizon. And if the legislation remains as it is, then the capital markets, too, will remain steady.