Unhedged forex debt spells trouble for firms like Bharti Airtel, Tata Motors, Tata Steel and

Reliance Communications
Shailesh Menon, ET Bureau Sep 26, 2011, 02.33am IST Tags:

Tata Steel| Tata Motors| Reliance communications

MUMBAI: Bharti Airtel, Tata Motors, Tata Steel and Reliance Communications, which have piled up foreign currency debt in their acquisition spree of the past few years, may be the unwanted stocks for investors as the Indian currency is whipsawed by foreign funds pulling out and a strong import demand, experts said. The fact that these companies have not hedged a good portion of their debt amid fears of a double-dip recession could well become a thorn in their balance sheets as international markets turn hostile to lending to emerging market companies. "Several Indian companies have taken huge working capital loans in foreign currency; these are largely unhedged borrowings," said Ritesh Jain, investment head at Canara Robeco Mutual Fund. "Companies with unhedged foreign exchange exposure on the liability side expose themselves to huge currency losses. We expect negative surprises in the September quarter." The rupee has fallen nearly 13% since August this year. Currently, trading close to 50 a dollar, the rupee has fallen to a 28-month low on September 22, as the global macroeconomic situation worsened even further. Even though a weakening rupee is beneficial to IT companies, the dollar's strength against other billing currencies, like euro and British pound sterling, will neutralise their 'export receivable earnings'. Corporate earnings may slow in the next three quarters, said Jain who owns stocks of dairy products and chocolate maker Nestle, soaps and shampoo maker Hindustan Unilever, and cement producer ACC, a unit of Switzerland's Holcim. Apart from a drop in operating margins, Indian companies will also have to wrestle with a general decline in demand. According to analyst reports, consensus earnings for FY12 have fallen 7% over the past six months and are currently hovering at 15% levels. "Our mid-term outlook for economy is slowing growth along with a stubborn inflation," Jain said. "The concern is as much local as it is global. Domestic consumption refuses to slow down even after a series of rate hikes. Global uncertainty and regulatory environment are now allowing capital formation needed for broadbased growth of economy and to dampen inflationary pressures," he said.

Despite a 20% correction in the market since January, Jain is not lured by attractive valuations as their performance will be the worst hit during tough times while top companies sail through. "Blue-chip companies and niche businesses will continue to command rich valuations while mid-, and small-cap stocks, with not much corporate performance, will remain cheap on valuation front," Jain said, adding, "We'll prefer to stay in good companies, even if it means paying a higher premium for investing in them." The fund house has sold some shares such as Infosys Technologies and TCS that may face a slowdown in order flows from the West. Some infrastructure-related stocks such as Coal India, Power Grid, L&T and NTPC have also been reduced in the portfolio. According to him, investors should invest in companies which can navigate through different business cycles and can adapt to a changing business environment. They should look at companies which have free cash flows, he said. "It is companies and not markets that create wealth," Jain said. Jain is also bullish on gold for the next three to four years and he believes that investors should have at least 10-20% of assets in it.

Why Buy NCDs Get Them for a Discount Some of the NCDs announced recently are now available at a discount in the secondary market
PRASHANT MAHESH

With equity markets in the doldrums,there is demand from investors for fixed income products.August saw back-to-back non-convertible debenture (NCD) issues from India Infoline Investment Services,Shriram City Union Finance,Mannapuram Finance and Muthoot Finance,with a fixed interest rate ranging between 11.5% and 12.25%.The NCD issue of Religare Finvest,which offers an even higher coupon rate of 12.5%,is currently on for subscription.After the initial public offering,all these NCDs get listed on the stock exchange.Hence,even after the issues close,investors have the opportunity to buy the NCDs from the secondary market.In fact,today in the secondary market,some of these NCDs are available at a discount to their face value (see table).This means that these NCDs will give you a higher yield compared with what was on offer at the time of the issue. THE REASONS FOR A DISCOUNT Analysts cite many reasons why NCDs trade at a discount.The secondary market price is determined by various factors such as companys outlook,financial strength,liquidity in the secondary market,demand and supply of the particular issue,coupon rate,duration of the bond,etc, says Rajaraman,certified financial planner and advisor,fundsindia.com.The major reason for a bond to quote at a discount is a change in the interest rate scenario.Interest rates and bond prices are inversely related,so when the interest rates go up,bond prices fall.If the coupon rate on a bond is lower than the prevailing interest rates,the market price of a bond falls.Now take the case of L&T Finance's N5 series bond.It is a 36-month bond issued in March 2010,with a coupon of 8.4%.But,now,it is quoting at.975,which means the effective yield for an investor would be 13.92%.As the rates have been on a continuous rise since March 2010,the bond price of L&T Finance N5 series has been aligning itself to the current interest rates of similar trading papers.Since March 2010,the RBI has raised interest rates 11 times.Hence,now,the bond has a mere 18 months left for maturity;it matures in March 2013.There are a set of investors who feel that interest rates are high today and close to their peaks.They,therefore,want to lock their investments in high interest rate bonds with longer maturity.Some investors are switching out from low coupon paying bonds and investing the proceeds in high coupon paying bonds with a longer tenure of five years and above, says Ajay Manglunia,SVP,fixed income,Edelweiss Capital.Another reason for a discount is the risk aversion of investors post the credit crisis in the US.After the downgrade of US by S&P and the worries in Europe,the risk appetite has gone down especially for NBFCs and those having exposure to broking or real estate, says Pankaj Jain,fund manager,Taurus Mutual Fund.This could probably explain why the NCDs of India Infoline Securities trades at a discount.Last but not the least,successive issuances from the same company lead to a discount.That may explain the discount on the NCDs of Shriram Transport Finance,which has been tapping the NCD market regularly.Once investors know that the company is going to tap the markets regularly,there is lower demand for the issues of that company,which explains the discount, says a fund manager,who did not want to be named.Companies like SBI,despite their low coupon rates,continue to trade at a premium

because they are not frequent bond market visitors,the fund manager says.The SBI N5 series,with a coupon rate of 9.95%,trades at.10,800,a premium of.800 to its offer price. IS THE YIELD ATTRACTIVE A 12% to 14% yield is very tempting (see table) for investors,but financial planners advise investors to do their due diligence before putting their money in NCDs.That is because NCDs are illiquid and their trading volumes are thin.This means that if you want to buy a higher quantity,you may have to pay a higher price.So what should retail investors do A buyer in the secondary market looking to hold the bond till maturity should look at the YTM (yield to maturity) and the rating of the bond, says Ramalingam K,director and chief financial planner,Holistic Investment Planners CHECK THE QUALITY OF PAPER NCDs are rated by credit-rating agencies.Rating gives you an idea of a companys financial strength and its capability to repaying debt on time.So,while an NCD of SBI was rated AAA,indicating highest degree of safety with regards to timely repayment of principal and interest,the NCDs from issuers like Muthoot Finance and Mannapuram Finance were rated AA-, indicating high degree of safety.One also needs to remember that ratings can change from time to time.Any downgrade in rating could lead to lower returns THE DURATION IS IMPORTANT All NCDs are different products maturing at different times.While the L&T Finance N5 paper matures in March 2013,an SBI N5 matures in March 2026.If you need money to meet a goal in say 2013,it would not make sense to buy a paper maturing beyond that time.The L&T Finance N5 paper will give you a 13.92% yield,if you do not need money in 2013,but then there is the reinvestment risk.Retail investors would do well to buy paper with an objective of holding it to maturity, says Pankaj Jain. LOOK OUT FOR PUT AND CALL OPTIONS A put option means the investor has the option to sell the NCD back to the issuer at particular time,while a call option means the company has the option to repay the NCD money before it matures.In a rising interest rate scenario,a put option will work in the investors favour while in a falling interest rate scenario,it will work in the companys favour.The first issue of Tata Capital launched two years ago had a put and call option at the end of 36 months and the 5-year bond of Shriram Transports issue in June had a put and call option at the end of four years.However,the issues of Muthoot Finance and Mannapuram finance did not have the put and call options. INVEST AS PER YOUR ASSET ALLOCATION PLAN Do not go overboard in buying NCDs just because they offer you a higher yield.Most NCD offerings are from NBFCs that carry higher risk due to their very nature of business.Do not invest more than 10-15 % of your fixed income portfolio in NCDs.Even that amount should be

spread across at least 2-3 companies, says Anup Bhaiya,MD and CEO,Money Honey Financial Services.prashant.mahesh@timesgroup.com TOMORROW As Terror Strikes Become Common,Would Terrorism Covers Make Sense

Structured to maximize returns Understand the concept clearly before investing in structured products offered by your wealth manager Also some structured products.That is how most of the conversations with investment experts end these days.Ask them for an ideal portfolio and chances are that you would hear something like a little bit of debt instruments,some equity products and,yes,you guess it,some structured products.No wonder,there are many skeptics who make fun of these products.They claim these products are designed to confuse customers and offer them the false comfort of maximum returns.Point noted,but you dont have to steer clear of these products without even trying to find out what they are all about.Structured products are customized products that comprise various financial instruments like derivatives,stocks,bonds and debentures with different investment strategies,in one investment basket.Or,simply put,its a pre-packaged product which invests in various underlying assets such as equity indices,stocks,commodities and interest rates.The performance of the product depends on the returns offered by these products, says an investment expert.Most structured products that are sold in India,have principal protection function as the key element.It simply means the full protection of principal if the investment is held till maturity.Structured products are designed to facilitate highly customized riskreturn objectives, says another consultant. Take a look at the example of a simple Nifty-linked capital protection structure.You are investing,say,Rs 100 in a product with a tenure of 40 months.Of this,Rs 80 is invested in debt securities,yielding a return of 6-7 % per annum.Thus,over a period of 40 months,you could get Rs 20 as interest on these debt securities.Hence,this ensures that your capital of Rs 100 is protected.The balance of Rs 20 is invested in the Nifty index.If the Nifty doubles in 40 months,Rs 20 will become Rs 40.Thus the value of your Rs 100 will be Rs 140 at the end of the period,giving you an absolute return of 40%.On the other hand,if the Nifty were to fall by say 50%,then Rs 20 invested would become Rs 10,thereby giving you Rs 110 back.This strategy ensures that at any given time your capital is protected and you will get Rs 100 back at the end of 40 months. While this is a simple structure,more complex structures using quantitative strategies could be deployed depending on the risk profile of the investor to generate higher returns. Structured products are privately placed and typically offered to high net worth individuals.Structured products are issued in the form of NCDs (Non convertible debentures),whose returns are linked to an underlying stock index such as the Nifty or a basket of stocks.Sophisticated structured products,depending upon the market conditions can be specially created for a set of clients and privately placed.The ticket size generally is Rs 10 lakh upwards.Typically,these products are designed by foreign banks and a few domestic financial institutions.They are distributed by wealth management firms,typically foreign and private sector banks to their high networth clients.One product could differ from the other based on its tenure,participation rate and trigger conditions.With their popularity increasing,they are also available in the form of mutual fund products,mostly as debt schemes in the form of fixed

maturity plans (FMPs). These products were initially offered to meet the needs of high net worth investors.However,they are now being offered to retail investors as well.The benefit of investing in these products would be that a sophisticated investor can theoretically take direct exposure in derivatives.However,the size required for direct access is not possible in most cases, says a mutual fund manager. These products were in big demand from HNIs early in 2008.But after the collapse of US investment bank Lehman Brothers,investors started fearing the issuers ability to return the principal.This has forced banks to search for simpler and more transparent options.The market for structured products was virtually shut for a while.The renewed interest in these pre-packaged products now indicates a return of confidence in the issuers, says a wealth manager. According to experts,most retail investors would find it difficult to grasp the complexity of these products.These days some banks have aggressively started pushing structured products to retail investors through their broking networks.Whether retail investors adequately understand the complicated structure of these products,which often has embedded options and implicit fees,is questionable.Also,the liquidity on premature redemption is cause for worry in most structured products,including even the listed ones, he says. Though most structured products offer "principal guarantee" function,which offers protection of principal if held,until maturity,there are also non-capital protected structured products,where the principal amount is not guaranteed.This exposes an investor to the risk of losing his capital.If we compare capital guaranteed structured products with FDs,mutual funds,equities,the degree of principal protection is higher in structured products and FDs.However,the liquidity is very low in structured products,though they have the potential of giving higher returns on maturity. Structured equity products provide higher returns to investors on their investments by adopting a view and accepting certain risks.However,these products do not talk about the credit risk involved in the debt component, says an investment consultant.Some of the structured products claim to perform across various market conditions.These products are designed in such a way that the fund can have a large cash component.If the fund manager doesnt utilize the entire fund,this will hurt the fund's performance in the longer duration, he adds. According to experts,the major concern with these products is the lack of rating,which makes it extremely difficult for retail investors to evaluate some structured products.The Securities and Exchange Board of India (Sebi) has asked credit rating agencies not to rate non-capital protected structured products.Without rating,it has become difficult for issuers to sell these products to investors.Structured products are not as simple as they appear.Since these schemes use a blend of investment strategies,it is difficult for most investors to understand the strategy driving the fund, says an expert. That is why most investment experts believe that it would take a while before investors would be ready to park money in structured products.The issuers will have to strive to make it more transparent and easy to understand.On their part,investors need to satisfy themselves that they understand the product very well and it suits their investment and return objective, says financial advisor. Do you need structured products >> Just because everyone is speaking about structured products is not a valid reason for you to park your money in them >> These products are pre-packaged products that invest in a variety of instruments in debt,equity,derivative,currency and so on >> Though most structured products

offer capital protection option,there are products that dont offer protection of capital >> Try to understand the product,the strategy behind it and the risk involved before signing up for it >> Dont take all the claims at face value,there are chances that some of the strategies may not work all the time >> Structured products are not the panacea for all your financial troubles.It is okay to say no if you cant comprehend them.

Infra projects to get credit booster Finmin May Allow Launch Of New Guarantee-Based Product By IIFCL Today
Sidhartha TNN

New Delhi: The government is expected to clear a new financing tool on Friday,which would help infrastructure project developers access funds at a cheaper rate based on a guarantee and also free funds for banks to lend to industry and retail borrowers.To begin with,this productcalled credit enhancementwould provide funding support of around Rs 15,000 crore. The proposal,which will be considered by the finance ministry,envisages a guarantee by government-promoted India Infrastructure Finance Co (IIFCL),which will subscribe to 25-50 % of the bonds being issued by the infrastructure company.This will be backed by an insurance cover by the Asian Development Bank (ADB) to the tune of 50% of IIFCLs exposure,which in any case enjoys sovereign guarantee. For instance,a specialpurpose vehicle floated by companies like GMR,Larsen & Toubro or GVK to construct an airport is raising Rs 4,000 crore debt by issuing bonds.Once credit enhancement is allowed,IIFCL will subscribe to bonds to the tune of Rs 1,000 crore.Of this,Rs 500 crore will be insured by ADB,while the remaining will enjoy government guarantee by virtue of sovereign guarantee of IIFCL. As a result of the credit enhancement,the SPVs rating would go up from BBB or BBB- to AA,making it investment grade for longterm players such as pension and infrastructure companies.So far,these investors have shied away from putting money in infrastructure projects as norms stipulate a minimum rating of AA for them to invest.Credit enhancement has a twin advantage.It will ensure that the projects are funded for longer tenure and also help maintain interest rate stability since banks reset interest rates, said an IIFCL executive. In February,TOI had reported that the government was working on the new tool.When contacted,IIFCL chairman and managing director SK Goel refused to share details and said the government and regulators were working on making credit enhancement a reality soon.A final decision could be taken in the next 10 days,he said. Besides,banks which would get their funds back once the bonds are issued would be able to focus more on industry and retail borrowers and avoid asset-liability mismatch which arises because nearly 80% of their deposits have tenure of up to two years,while infrastructure loans typically have a 15-20 year term. IIFCL has shortlisted around 10 projects belonging to GMR,GVK and L&T,of which four-five would be eligible for credit enhancement in the first phase.The lender has set aside a target of Rs 5,000 crore for now,which means nearly Rs 15,000 crore of funding can take place through this route.The sources said that the infrastructure finance company has held discussions with insurance companies,including Life Insurance Corporation of India,and provident and pension fund players.

Mineral Explorers May Get New Tools to Raise Funds Mines ministry consults Sebi,banks,Edelweiss for apt market models
MEERA MOHANTY NEW DELHI

The government is exploring options to create innovative market structures that would attract investment in the exploration of minerals,an activity that typically requires commitment of large sums of money.The ministry of mines,in consultation with markets regulator SEBI,the department of revenue and banks and financial institutions,is looking at mining-specific models such as the follow-through share options and segmented exchange models,to attract larger players into investing in the industry,a ministry official said.We feel this will increase attraction for investors in India,not only retail investors,but also mining companies that could invest in junior exploration companies, mines secretary S Vijay Kumar told ET recently.This would also make the large area prospecting licences (LAPL) feasible,particularly for unexplored deep seated base minerals.The risks for exploratory companies working on LAPL (as proposed in the new MMDR Bill) are even higher and the success of such projects will depend on venture capital funding that must get a share of the tax benefits that exploration companies are eligible for, Mr Kumar added.Follow-through shares are prevalent in mining-rich countries such as Canada and Australia.They are typically common shares that carry special tax advantages and are issued by resource companies to raise funds for exploration and development activities.Taxation laws in such countries allow for money spent on exploration and development to be deducted from the companys net income.Similar deductions are also allowed to individuals who may then apply it against their personal income for tax purposes.The mines ministry sees the move as part of its complimentary,non-legislative measures to bring into effect the new mining bill when it is cleared by the Cabinet and by Parliament.The idea of segmented stock exchange listing for exploration projects can be compared to new drug discovery projects,which raise funds depending on the success of different stages of clinical trial results.Giving an example,Mr Kumar said that if three guys from IIT Kanpur decide to raise funds for exploration lease,they will have to come to the stock exchange with a disclosure on their exploration finding,verified by a third party.Based on this,they can raise their next tranche of loans.Junior exploration companies look for new deposits of minerals and typically target properties that have significant potential for finding large mineral deposits.Such companies are critical in the early stages and a major source of future mine supply as they find promising properties,prove resources,stake the raw material and bring mines into production.Such companies,with a team of highly-trained geologists,geophysicists and engineers are best positioned to evaluate whether a property is economically viable.The first inter-ministerial committee meeting,also attended by representatives of Yes Bank,SBI Capital and Edelweiss,also discussed the possibility of the private-public participation mechanism on the lines of special purpose vehicles in infrastructure and power,as well as the setting up of dedicated institutions.For any price discovery,a market structure mechanism is always appropriate as it is the most efficient and transparent, said Rashesh Shah,chairman of Edelweiss Capital.

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Shady moves in FCCB buybacks

Sunny Verma

Posted: Friday, Sep 23, 2011 at 0444 hrs IST Tags: FCCB | Reserve Bank Of India | Rating Agency Crisil | Karur KCP

New Delhi: Faced with acute redemption pressures on foreign currency convertible bonds (FCCBs) issued between 2005 and 2008, a clutch of Indian corporates is allegedly resorting to ways less than honest to escape defaults. Some hedge funds have complained to the banking and markets regulators about issuers hammering bond prices, and then cornering them in the secondary market through various nominees, sources said.

Once they get control over the majority of these FCCBs, issuing companies can then restructure the terms of these bonds, such as the conversion price and redemption premium, in a manner that suits their plans. But the practice would indeed undermine minority bondholders interests, these hedge fund managers told the regulators. Worse, since Indias bankruptcy system is far from perfect, bondholders could virtually be left with no recourse if the companies choose to shortchange the bondholders. A company can pass a resolution for changes in FCCB terms with the approval of a majority of bondholders, which can be 67% or 75%, depending on the terms of bond issues. Two hedge fund managers, one based in Singapore and another in Hong Kong, told FE that corporate India could still be staring at the mother of all defaultson their FCCB issuance, and matters could get worse if bondholders and issuers get dragged into long-drawn legal battles. Some companies, by the way, are working with bondholders to renegotiate the bond terms. Indian companies raised over R70,000 crore via FCCBs during the bull run between 2005-06 and 2007-08. As much as R43,000 crore worth of FCCBs will mature by March 2013. The Reserve Bank of India and the finance ministry have highlighted the redemption risks relating to these bonds, especially since stock prices of most issuers have tumbled much below their conversion prices. Rating agency Crisil said in a May report that FCCBs worth Rs 22,000-24000 crore may not get converted into equity shares.

Only last week, a Singapore-based hedge fund 3 Degrees Asset Management Pte complained to Sebi alleging a foul play by FCCB issuer Tamil Nadu-based Karur KCP Packagings, which restructured terms of its $10 million FCCBs after securing majority bondholders approval. The fund owns 11% of the packaging companys bonds. Karur KCP has maintained that the restructuring was done after securing all approvals required under the law, and keeping the enterprise interests in mind. We are having a case with a packaging company Karur KCP Packagings, where we are minority bondholders. We at 3 Degrees Asset Management have reasons to believe that the company covertly bought back its bonds back from the secondary market through various nominees. These nominees then voted against other minority bondholders to change the terms of the FCCBs unfavorably,said Tanuj Khosla, Research Analyst at 3 Degrees Asset Management. The foreign fund earlier wrote to the Reserve Bank of India to recover its investments, and has now moved the Securities and Exchange Board of India. We have filed an official complaint with the RBI (some months ago). They (RBI) have told us to go to Sebi, and we have sent our complaint to the market regulator last week, said Khosla. A leading supplier of cement bags, Karur KCP raised funds through FCCBs in April 2006 bearing 2% interest coupon at a conversion price of Rs 75 a share. Closer to the maturity, the company extended the tenure of FCCBs by another 5 years while coupon was cut to zero. The new conversion price was reset at Rs 300. These changes were approved by majority bondholders as well as the RBI but 3 Degrees Asset Management alleged irregularities in this scheme. V Venkatesan, company secretary & compliance officer, Karur KCP, said: Twice we held our AGM to restructure terms of FCCBs. Everything was done in a proper manner, and we went ahead only after the majority bondholders approval and RBIs permission. He said the decision to increase the tenure of bonds was taken to support expansion plans of the company and keeping the financial position in mind. The company is committed to return its dues as soon as it generates good profits, he added. However, Khosla argued that Karurs action subverted the spirit of law, and has the potential to adversely affect the FCCB market as investors lose confidence in companies. If a company is defaulting on debt, then one can understand. Corporate defaults are not a new phenomenon. But what Karur did subverts the spirit of law. And to top it all, the company was considering a dividend payout to shareholders at a recent board meeting, he said. A Delhi-based lawyer specialising in securities laws, who did not wished to be named, said some companies are driving down their FCCB prices, and then gaining a direct or indirect majority control by buying back the bonds. He also pointed out the poor protection that Indian laws offer to the investors.

Ajay Shah, senior economist at the National Institute of Public Finance and Policy, said Indian bankruptcy laws provide poor protection to all bondholders, and that the bondholders are mostly at the mercy of the issuer. But Shah noted that RBI and Sebi may not be able to do anything much in case the defaults rise. Industry analysts note that redemption problems could get compounded if the world economy goes into a recession. That would be double blow as issuers stock prices would fall further while the cash flow position will weaken, severely affecting the debt-to-equity ratios of the companies concerned. The RBI recently allowed companies to buyback FCCBs up to March 31, 2012 at increased discount rates, while the government liberalised the external commercial borrowings window to help companies refinance FCCBs. Industry-watchers, however, argue that buybacks would only postpone the problem, not resolve it.

LIC lines up Rs 30,000 cr for infrastructure play this year

Shilpy Sinha, ET Bureau Sep 15, 2011, 01.00am IST Tags:

Life Insurance Corporation

MUMBAI: State-run Life Insurance Corporation (LIC) will invest in the government's infrastructure debt fund (IDF) and take-out finance schemes to meet its sector target of 15% of the total income, or 30,000 crore, this financial year. The country's largest life insurer has not been able to meet the minimum investment requirement of 15% because there are not many high-rated papers. In infrastructure, the regulator allows investment only in 'AAA'- or 'AA'-rated debt papers. "We have 12% exposure to infrastructure, while we have to invest 15% of the total income in the same. There is headroom of 3%, which we are looking to deploy in IDF and take-out finance schemes of the government," a senior LIC official said.
The Insurance and Regulatory Authority (Irda) guidelines require companies to invest a minimum 15% of their total income in infrastructure, going up to a maximum of 50%. The investment norm applies to traditional portfolio.

LIC has the highest traditional portfolio in the country, with 60% of its income coming from these products. "We are working out the modalities of setting up the fund with the regulator. We are looking to sponsor it," the official said. The government plans to spend over $1 trillion on infrastructure during the Twelfth Five-Year Plan (2012-17). Infrastructure debt fund is a debt instrument being set up by the finance ministry to channelise long-term funds into infrastructure projects that require stable investments. As per the structure laid out by the ministry, an IDF can either be set up as a trust or a company. For take-out financing, the regulator has tied up with India Infrastructure Finance Company (IIFCL) to buy long-term loans of banks.

Take-out financing refers to an arrangement where a bank offers a short-term loan to a project with the commitment that it can sell the loan to another financial institution or company for the rest of the term. LIC expects a 25% increase in premium income for the current fiscal. Last fiscal, the insurer earned over 2 lakh crore, a large part of which went into government securities.

Dollar shortage may choke India Inc.'s overseas borrowing

Priya Nair Share print T+

Only companies that can pay a premium will be able to tap the market
Mumbai, Sept. 21:

The recent relaxation by the Government, allowing India Inc. to borrow more overseas may not be of much help given the shortage of US dollars in the overseas market. While it is cheaper to borrow overseas due to the huge interest rate differential, the currency shortage is making it difficult for borrowers to do so. Only top-notch companies willing to pay a premium or highly-rated ones will be able to borrow overseas, said bankers. Mr Moses Harding, Head-Global Markets, IndusInd Bank, said the Government's move to relax the overseas borrowing limit gives comfort to companies that there is a window available to them. The demand is huge, but supply is limited. So, lenders are charging a premium. Spreads on foreign currency loans have already gone up and will go up further. Only those corporates which have the ability to pay the premium will borrow, he said. In fact, the dollar shortage, which has been there since July, is one of the reasons for the reversal in the rupee's fortunes, Mr Harding added.
Liquidity constraint

According to Mr Tarun Anand, Managing Director and Senior Company Officer, South Asia, Thomson Reuters, liquidity is a constraint and it is going to be harder. The relaxation will allow only few large corporates to borrow overseas. Vast majority of them will not be able to borrow. But due to the attractive pricing, some companies will borrow overseas, he said. A report by Espirito Santo Securities said that even after adjusting for hedging costs, a AAArated Indian borrower can save over 100 basis points by borrowing abroad than domestically. Thus, while the willingness and ability to borrow may prompt Indian corporates to go in for more External Commercial Borrowings, the availability of funds may become a constraint.
Credit default spreads

Ms Deepali Bhargava, Chief Economist with Espirito Santo Securities, said the credit default spreads have widened from 12 basis points to 28 basis points in September. This indicates the rise in the premium that borrowers will have to pay for their loans. The widening is not as steep as was seen in October 2008 during the Lehman crisis, when the spreads widened to 350 basis points. But they are on the rise, she said. Libor rates too have increased between July and now. In July the three month US Libor was 0.25 per cent and now it is 0.35 per cent.

Steps by central banks

Last week, the European Central Bank, the US Federal Reserve and some other central banks, including Bank of England, the Bank of Japan and the Swiss National Bank, announced some liquidity measures. The banks said they would carry out fixed-rate repurchase obligations against eligible collateral. These measures may help in brining down the Libor rates to some extent. But even if the Libor decreases, the spreads will still be high, Ms Bhargava added.

Unhedged forex debt spells trouble for firms like Bharti Airtel, Tata Motors, Tata Steel and Reliance Communications
Shailesh Menon, ET Bureau Sep 26, 2011, 02.33am IST Tags:

Tata Steel| Tata Motors|

Reliance communications

MUMBAI: Bharti Airtel, Tata Motors, Tata Steel and Reliance Communications, which have piled up foreign currency debt in their acquisition spree of the past few years, may be the unwanted stocks for investors as the Indian currency is whipsawed by foreign funds pulling out and a strong import demand, experts said. The fact that these companies have not hedged a good portion of their debt amid fears of a double-dip recession could well become a thorn in their balance sheets as international markets turn hostile to lending to emerging market companies. "Several Indian companies have taken huge working capital loans in foreign currency; these are largely unhedged borrowings," said Ritesh Jain, investment head at Canara Robeco Mutual Fund. "Companies with unhedged foreign exchange exposure on the liability side expose themselves to huge currency losses. We expect negative surprises in the September quarter." The rupee has fallen nearly 13% since August this year. Currently, trading close to 50 a dollar, the rupee has fallen to a 28-month low on September 22, as the global macroeconomic situation worsened even further. Even though a weakening rupee is beneficial to IT companies, the dollar's strength against other billing currencies, like euro and British pound sterling, will neutralise their 'export receivable earnings'. Corporate earnings may slow in the next three quarters, said Jain who owns stocks of dairy products and chocolate maker Nestle, soaps and shampoo maker Hindustan Unilever, and cement producer ACC, a unit of Switzerland's Holcim. Apart from a drop in operating margins, Indian companies will also have to wrestle with a general decline in demand. According to analyst reports, consensus earnings for FY12 have fallen 7% over the past six months and are currently hovering at 15% levels. "Our mid-term outlook for economy is slowing growth along with a stubborn inflation," Jain said. "The concern is as much local as it is global. Domestic consumption refuses to slow down even after a series of rate hikes. Global uncertainty and regulatory environment are now allowing capital formation needed for broadbased growth of economy and to dampen inflationary pressures," he said. Despite a 20% correction in the market since January, Jain is not lured by attractive valuations as their performance will be the worst hit during tough times while top companies sail through. "Blue-chip companies and niche businesses will continue to command rich valuations while mid-, and small-cap stocks, with not much corporate performance, will remain cheap on valuation front," Jain said, adding, "We'll prefer to stay in good companies, even if it means paying a higher premium for investing in them." The fund house has sold some shares such as Infosys Technologies and TCS that may face a slowdown in order flows from the West. Some infrastructure-related stocks such as Coal India, Power Grid, L&T and NTPC have also been reduced in the portfolio.

According to him, investors should invest in companies which can navigate through different business cycles and can adapt to a changing business environment. They should look at companies which have free cash flows, he said. "It is companies and not markets that create wealth," Jain said. Jain is also bullish on gold for the next three to four years and he believes that investors should have at least 10-20% of assets in it.

India Inc may Soon Get to Access More Foreign Loans Govt likely to ease price ceiling
OUR BUREAU MUMBAI

Indias policy-makers are on course to ease rules on the pricing of foreign loans to help local lenders and corporates access relatively cheaper funds as the ongoing debt crisis in Europe threatens to hamper their efforts.The finance ministry and the Reserve Bank of India (RBI),which administer these rules,have decided to allow Indian firms to borrow overseas at rates that are higher than the ceilings now applicable on short,medium and long-term borrowings.The plan is to raise the ceilings on cost of borrowings by at least 100 basis points,said a person familiar with the proposal.Companies which raise foreign loans with a maturity of one year or less can do so if interest rates are below 200 basis points over the London Inter Bank Offered Rate or Libor --the pricing benchmark.For loans with a tenor of three to five years,rates have to be below 300 basis

points and for over five years,it has to be 450.Companies will soon be allowed to contract debt at higher rates for all these maturities.The policy response has been fashioned by the debt crisis in Europe which has led to many borrowers in India,especially banks,finding it tough to raise loans within price ceilings set by the government and the RBI.Even some of the European banks have been finding it tough to raise dollar funding.An official who is familiar with the deliberations said there is a case for allowing Indian corporates to borrow overseas at higher spreads in the changed circumstances.With local rates rising after RBIs monetary tightening over the last year,Indian companies have been active till recently in mobilising debt abroad.In the first quarter of this fiscal,Indian firms borrowed $8 billion compared to $5.3 billion in the year ago period on the back of low interest rates.But this was before the crisis in the euro zone started playing out resulting in many European banks experiencing difficulties.Indian companies raised over $17 billion for the fiscal year 2011,taking advantage of relatively low interest rates.

RBI Allows Infra Companies To Raise YuanDenominated Debt

by Charmi Gutka | September 28,2011 - 05:58 PM Topics : Regulatory Industries : Infrastructure Share |

In an attempt to boost capital inflows in the infrastructure sector, RBI has allowed Infra companies to to raise Chinese yuan-denominated debt, through the approval route. RBI has also raised the borrowing limit for companies. However, once approved the approval of the Reserve Bank will be valid for a period of three months from the date of issue of the approval letter and the loan agreement should be executed within the validity period. RBI has also relaxed for infrastructure companies with direct foreign equity up to 25% to raise fund overseas without government permission. Direct foreign equity holder (holding minimum 25% of the paid-up capital) and indirect foreign equity holder holding at least 51% of the paid-up capital, will be permitted to provide credit enhancement for the domestic debt raised by Indian companies engaged exclusively in the development of infrastructure through issue of capital market instrument. The company fulfilling foreign equity criteria does not require permission for raising ECB up to $5Mn. Now onwards the term debt in the debt-equity ratio will be replaced with ECB liability and the ratio will be known as ECB liability-equity ratio to make the term signify true position as other borrowings or debt are not considered in working out this ratio.