Following biggies, midcaps seen going on refinancing spree

Companies which had borrowed overseas when local liquidity was tight are now refinancing their loans on more favourable terms and conditions and also getting extensions on repayment.

In little over two months, the Tatas, Birlas and the Ambanis have all refinanced external debt and extended the tenure of their loans.

On September 29, Tata Steel entered into an agreement for refinancing a £3.53 billion (Rs25,000 crore) term loan incurred at the time of the acquisition of the UK-based Corus Plc in 2007.

The new agreement relaxes the repayment obligations for the next five years. It also gives flexibility to incur higher capital expenditure in Europe and to raise working capital depending on business needs.

On October 15, Reliance Holdings, a subsidiary of Reliance Industries, raised $1.5 billion (Rs6,800 crore) through two bonds, one maturing in 2020 and the other in 2040.

Part of the money raised would be used to refinance $765 million (Rs3,500 crore) of loans taken for acquisition of shale-gas ventures.

On December 10, Novelis, the subsidiary of Aditya Birla’s flagship Hindalco, announced raising $2.5 billion (Rs11,335 crore) through a bond sale. This would help the company extend repayment schedule by 2-5 years.

A longer tenure allows companies to focus on business expansion rather than repayment of debt.

In the current environment where liquidity is ample, companies are also able to refinance at better rates or more favourable conditions, said investment bankers.

“Refinancing offers them more flexible terms and conditions. It is likely that one might see companies in the midcap space exploring this route in the days ahead,” said Asit Bhatia, managing director of global corporate and investment banking group-India at Bank of America.
Companies in sectors which are seeing issues with liquidity could be next in line for refinancing.
Outside of midcaps, certain cash-strapped real estate and aviation companies may also be exploring options, experts said.
Higher-rated companies will be in an even better place to refinance their debt.
“In the offshore market, the liquidity situation is very comfortable so the highly rated companies will go for that advantage of refinancing of their loans for longer tenures. This is because of the divergence in monetary policy here and vis a vis offshore,” said Hemant Mishr, managing director and head of global markets, South Asia, Standard Chartered Bank.
The Reserve Bank of India has been tightening interest rates, while its counterparts in developed countries maintain a loose monetary stance to encourage growth.
“The rates are very attractive and based on each corporate’s history they can get longer-term loans,” said Ramit Bhasin, head of markets (India) of global banking and markets division, Royal Bank of Scotland NV.
In India, if a AAA-rated firm is planning to raise funds in the domestic market, then the prevailing coupon rates are in the range of 8.80% to 8.90% for a three-to-five-year debt.
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The rates rise to 8.95% to 9.05% for issuances over five years.
In the international market the cost of raising funds by way of bonds of maturity between three to five years is about 300 basis points above the six-month Libor and it is 500 basis points over six months Libor for maturities over five years.
The six month Libor is currently at 0.46%, meaning the basic interest rate would be just 3.46% for a 3-5 year loan. Include currency hedging costs and intermediation costs and companies can still raise money under 5% — a 350-400 basis points lower than the local rate.