Debt syndications: Gung-ho and poised for a great leap

Updated: Jan 28 2002, 05:30am hrs
Before the Asian crisis, cumulative syndicated loans in the region were high: about $176 billion from over 1,500 deals. Then came the crisis at the end of 1997 and volumes went down in 1998 to $75 billion. It started to pick up in 1999. The following year was a good one: worth over $200 billion. In non-OECD Asia, Hong Kong is still the biggest, with around $27 billion of loans completed in 2001, roughly half of the market being outside Japan and Australia. Korea was the next biggest followed by Taiwan.

What about the local debt market Says HSBC’s senior manager, debt capital markets and risk advisory, Sanjay Phadke: "The debt market in India, which was almost non-existent 10 years ago, is today a thriving Rs 60,000 crore market that owes its phenomenal growth to favourable trends on both the demand and the supply side. In terms of supply, the inflow of funds into the market has been greatly enhanced by the deregulation of traditional banking sector investors and the rise of non-traditional investor classes such as mutual funds. From the demand side, the widening difference between rates offered in the loan market as compared to the bond markets, has made many a corporate treasurer tilt in favour of the latter."

"It is a relatively new market and has great potential for growth," said ABN Amro Securities India Pvt Ltd’s managing director Vishnu Deuskar.

The major players in the market can be categorised into three: investors, issuers and the intermediaries. The first category of investors encompasses banks, institutions, mutual funds, provident/pension fund etc. The second can again be classified into three main categories -- private-sector corporates, central or state government undertakings financial institutions and non-banking finance institutions. The third category is the intermediaries in this process, the merchant bankers: domestic, foreign, fund- or non fund-based houses.

"Interme-diaries control around three-fourths of the syndication market," says Centrum Finance Ltd’s executive director, Rajendra Naik. Centrum Finance has a track record of syndicating over Rs 1,200 crore in the last fiscal.

Says Mr Naik: "The market will continue to be vibrant as a result of a comfortable liquidity situation and a low interest rate regime which is expected to prevail through the current fiscal. The concept of debt syndication for project finance/term loans are not mature and only about five-eight per cent of the total credit offtake is syndicated. The main reason for this is the traditional banking system which is used to ‘walk in’ borrowers and hence lack of a marketing structure."

On the other hand, there are state government undertakings, which have been raising huge amounts on the back of the state-guarantees. They manage to get investment grade ratings on the back of these guarantees.

The principal reason for the success of these issues is that some investor classes like state-run banks have to invest in such instruments.

It is this second segment which has raised concern as these liabilities effectively become contingent liabilities of the states, since the related projects are not likely tp pay for themselves.

In the current age of fiscal prudence with the consolidated fiscal deficit reaching high levels, this is hardly music to the ears of regulators, international rating agencies and multilateral agencies.

"The debt market has been in a process of flux over last few months. First the events of 9/11 paralysed world markets and affected India as well. The Indo-Pak border tensions have brought new uncertainties to the fore. While April-September 2001 saw total fund-raising of Rs 22,847 crore, the period thereafter is likely to see some contraction," points out Mr Phadke.

"However, any such downward pressure is likely to be counteracted by the record low levels of interest rates prevailing in the country." The 10-year benchmark government security yield (11.50 per cent 2011A) currently is hovering around 7.70 per cent as compared to around 10.50 per cent in the same period last year,’’ he adds.

All in all, the future of the market is extremely bright. Compulsory dematerialisation has solved many of the problems of physical settlements, differential stamp duties and the resultant lack of liquidity. This is expected to usher in a new era, akin to that in the equities market, which was completely transformed after electronic trading and dematerialisation.

The Reserve Bank of India is also taking steps towards electronic trading in bonds by promoting the Negotiated Dealing System (NDS). The NDS is likely to kick-off in early February 2002. This system will initially be limited to government securities only.

The most crucial change in the coming year will however be the increasing use of bond-linked derivatives by top-tier corporates, which would serve multiple objectives such as lowering the cost of liabilities and the implementation of informed views on various financial parameters.

In fact, use of sophisticated financing techniques can actually go beyond liabilities, and can reduce the overall risk on the balance sheet, by impacting the asset side also.

These exciting developments, coupled with the improvements in the issue process, disclosure requirements and prudential guidelines for investments, would definitely make this market on par with developed countries’ debt markets.