IDBI bonds: India Inc, here's some cheaper money for you

A high level of foreign currency convertible bond (FCCB) redemptions this year and high local interest rates have led several Indian companies to tap markets abroad for foreign currency loans.Now banks are jumping on the bandwagon.

On Thursday, IDBI Bank became the first bank this year to announce the closure of a Swiss Franc bond issue after successfully collecting 110 million swiss francs ($120 million) at a coupon rate of 3.125 percent. The bank said the main investors in the issue were high networth individuals and private banks.

So why a foreign currency bond?

Melwyn Rego, executive director, IDBI Bank, said it was trying to match market needs by launching the bond. The bond’s proceeds will be used for helping Indian companies refinance FCCB debt and other loans.

India Inc will have to service almost Rs 40,000 crore of FCCBs this year, and according to a recent Fitch Ratings report, companies are likely to default on almost 20 percent of these due to the locally stressed liquidity situation. In such a scenario, most FCCBs will have to be refinanced by other foreign currency debts, which is where banks like IDBI see the opportunity.

Moreover, for infrastructure and many other projects, the cost of rupee loans is still very high. Even after taking into account hedging costs, foreign currency loans are still cheaper( particularly those denominated in Swiss francs) for Indian companies, which is why such loans continue to be in demand even now.

The Economic Times also recently noted , “In terms of overall borrowing rates also, the Swiss market is cheaper compared to traditional markets. Hedging costs are lower while borrowing in Swiss francs,” said Sunil Agarwal, head, institutional client group, Deutsche Bank India.

No wonder, banks and companies are rushing to the Alps.