Funds to be mopped up by issuing senior unsecured foreign currency bonds
Canara Bank on Friday announced that its board has permitted raising up to $500 million by issuing senior unsecured foreign currency bonds in international market as part of its $2 billion medium-term note programme.
The bank has so far raised $1.1 billion under this programme, it said in a regulatory filing. The board has also approved raising up to Rs 1,128 crore via a rights issue to existing shareholders. As of June 2016, the government had 66.3% stake in the bank and public shareholders held the remaining.
At current valuations, this will lead to close to 7% dilution in the bank’s equity. This announcement comes at a time when there’s been a bit of a slowdown in capital raising by Indian companies via bond issuance in international market. Between April and September this year, Indian companies borrowed $3.63 billion from overseas markets through bond issues – around 15% lesser than the year-ago period.
In the corresponding period a year ago, India Inc had borrowed $4.24 billion through bond issues abroad. This included Bharti Airtel’s $1 billion issue of bonds at a coupon of 4.37%, maturing in 2025. There had been other large-ticket bond issues as well, such as Bank of India’s $750 million issue and Bharat Petroleum Corporation’s $500 million issue. If one does not include the amount raised through masala bond issues, this year has seen only $2.39 billion being been raised through issues abroad. Bond arrangers said with the added cost of hedging the foreign currency risk that comes with a foreign currency bond issue, the total cost of funds is way higher than what a company would have to pay in India.
Ajay Manglunia, executive vice president and head – fixed income markets at Edelweiss Financial Services, points out that a high-rated corporate can borrow at rates as low as 7.5%-8% from the domestic market. “But with an overseas issue, even though the yield on the instrument may appear very low, considering the hedging cost, the effective cost comes to around 10%, which is way higher than in India,” he said.
Depending on the country where the bonds are being issued and the nature of the instruments, coupons this year have ranged between 0% and 5.5%. Manglunia said the typical tenure for overseas issues is 3-5 years and for that kind of tenure, the Indian debt market is very competitive. Another possible reason for a decline in overseas bond issues is lack of expansion initiatives currently being undertaken by Indian companies. “A company typically taps the overseas market when it is looking to undertake expansion. If you see, not a lot of companies have any major expansion plans right now and that is also a factor,”
Kartik Srinivasan, senior vice-president at ICRA, told FE.