Exim bank entered the domestic debt market on November 25 to raise Rs 700 crore of funds through a bond issue, offering investors to choose between tenor ranging from one year to five years. The issue has a greenshoe option of Rs 350 crore.

"Exim Bank floated the bond issue to raise funds to meet its disbursement targets. The institution would also need foriegn currency funds to provide forex credit to needy clients," a source said.

Exim Bank may name an intermediary financial institution for working out the swap deal soon after the bond issue closes for subscription.

"Right now, it is unclear whether the entire proceeds or part of them would be swapped with foreign currency raised from international markets for a similar tenor. The swap deal would depend on requirements as per the internal budgeting by Exim Bank for this year," the source said. Sources at the trade financing institution said they expect the issue to be fully subscribed as the issue has been rated "AAA" by credit rating agency CRISIL.

The bond issue has two options of one- and two-year maturity carrying an interest rate of 10.90 per cent and 11.40 per cent, respectively. The rate of interest on the remaining two options of three- and five-year maturity will be determined on the basis of a book-building exercise.

The range for the three year bond is between 11.55 per cent and 11.75 per cent, while the range for the five year bond is between 11.85 per cent and 12.05 per cent.

"A final picture about the response to the issue will be known after the book-building is over. We are optimistic that the bond issue will generate a good response," Exim Bank officials said.

The idea of swapping fixed rupee liabilities with forex funds raised at floating benchmark interest rates may work out economical for Exim Bank since even after factoring the current six-month annualised premium, the overall cost of funds works out to around 10.60 per cent, which is lower than the average coupon on the bond issue.

There are indications that the forex funds swapped with the rupee proceeds may be pegged to LIBOR, which currently rules at a half-yearly 6 per cent. If the deal goes through, Exim Bank will swap the bond issue proceeds with forex funds, with the intermediary taking the exchange rate risk for a commission.

Exim Bank raised Rs 2,066 crore through rupee borrowings during the year ended March 31, 1999. The institution has also drawn $ 3.58 million under various import lines of credit availed from international banks and financial institutions during the previous financial year. As on March 31, 1999, the bank had a pool of foreign currency resources equivalent to $ 337.73 million comprising a medium-term swap of $ 41.28 million and forex borrowings of $ 296.45 million.