With interest rates rising in the domestic market and bank loans becoming costly, power sector lenders are increasingly looking to the international market for cheaper funds to keep in check their borrowing costs and maintain interest spread.
The share of foreign currency borrowings has already risen in the fund portfolio of key power sector lenders like Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). While share of foreign currency borrowings in REC’s portfolio has gone up from 3% in the financial year 2009-10 to 10% in 2010-11, PFC’s increased from 4% to 5% in the same period.
The funding requirement of the Indian power sector is projected to rise from $230 billion in the current Plan to $245 billion in the coming 12th Plan. Tapping the domestic market for resource mobilisation may be the first preference for key power sector lenders, like PFC and REC, but they also have to look at the borrowing costs.
?Our foreign currency borrowings will rise if the cost of funds remain high in the domestic market,? PFC chairman Satnam Singh told FE.
PFC is expected to raise fresh equity through a follow-on public offer (FPO) in the coming financial year. That should hike the company’s net worth and its ceiling for foreign currency borrowings. ?Our entitlement for foreign currency borrowings will rise significantly post-FPO?, Singh said.
Meanwhile, REC is also looking to increase the share of overseas borrowings. ?All the demand cannot be met through domestic sources. International market needs to be tapped,? REC chairman JM Phatak said. The company recently hit the international capital market with its maiden $500-million foreign currency bond issue.
The issue was oversubscribed three times. REC sold the bond at a fixed coupon of 4.25%, the lowest-ever for an Indian issuer. The spread was just 250 basis points over US Treasuries.
While Indian corporates and banks have been accessing the foreign currency bond market for funds, non-banking finance companies (NBFCs) have traditionally kept away. REC is the first Indian NBFC to sell a foreign currency bond.
?The transaction allows REC to establish its name in the international bond market and to diversify its funding profile and open new avenues to fund its growth,? Phatak said.
REC management is apparently encouraged by the enthusiastic response to its maiden foreign currency bond issue and plans to tap the international capital market for further resource mobilisation.
The NBFC plans to raise Rs 28,000-30,000 crore under its fund mobilisation programme for the coming financial year 2011-12, a significant chunk of which may come from the overseas market.
The market assessment is that with inflation untamed, Reserve Bank might further increase interest rates. ?Interest rates will remain high in 2011,? DK Joshi, director and principal economist, Crisil, said.
With the domestic capital market facing a liquidity crunch, these power sector lenders have no option but to tap the international market where interest rates still remain lower and there is a huge appetite for Indian power sector debt papers as well.