Banks shelve MTN issues as Libor flies

At 300 bps-plus, spreads are 50 bps above the RBI norm

The seizure in the global credit markets has put the medium-term note (MTN) programmes of banks on ice.

Indian banks have been floating MTNs to raise money through their branches abroad. Besides lower rates, banks don’t take any currency risk because the money is not brought into India.

But the subprime home loans crisis in the US has lifted debt rates - indicated by the spreads on the London Interbank Bid Offer Rate or Libor — to unaffordable levels.
Thus Indian fund seekers have no choice but to shelve their plans for now.

Syndicate Bank has already announced that its $125 million MTN plan has been deferred indefinitely.

IDBI Bank, which had lined up a huge $1.5 billion issue, has also kept the float in abeyance.

Some corporates are also said to have pulled back plans.

Interest rates on the MTNs are pegged to the Libor. Indian banks were paying 100-150 basis points premium over the Libor for a 10-year loan last year, but since the credit freeze, the premium has doubled to 300 basis points.

Also, the Reserve Bank of India regulations said banks can’t borrow at more than 250 basis points above Libor for a tenor of five years and above.

R K Bansal CFO, IDBI Bank, said, “The current strain is because of the subprime problem. In any case we have filed an umbrella prospectus which is valid for a year and we will raise the money only after our overseas branches are opened and that too if the market is right.”

IDBI is planning to open branches in Singapore and Bahrain by March next year if it gets approvals on time.

An official from Canara Bank, which had raised money through such MTNs last year, said the bank had borrowed at 132 basis points above Libor last year.

The problem, bankers say, is that there is no clarity on the time it could for the credit crunch to lessen.

In fact the fear is that it could worsen as rates on some more of the subprime loans in the US are up for re-pricing next year.

Axis Bank treasurer P Mukherjee said it is time to wait.

“We could have raised money but looking at the situation we decided to wait. Nobody knows till when this situation will last.”

Private banks such as Axis have been actively raising money abroad through its branches.

In January Axis raised $250 million through a three-year floating rate bond priced at 47 basis points above three-month Libor, just a week after State Bank of India sold its paper at a miserly 45 basis points over Libor.

But that was then.

“Now if I were to raise the same three-year money it would cost me 150 basis points above Libor,” says Mukherjee.