Despite warnings by the Reserve Bank of India and proding by banks, most companies are still keeping their foreign currency...
Despite warnings by the Reserve Bank of India and proding by banks, most companies are still keeping their foreign currency loans unhedged as higher hedging costs deter them and a stable currency gives comfort.
Brijen Puri, head of trading at JP Morgan, said incrementally hedges have gone up but a large part of outstanding forex loans is still not protected through hedges. “What could be the case is that incrementally companies are hedging but old loans are still not hedged,” said Puri.
By all means the biggest deterrent has been high hedging costs for companies. Hedging costs have been climbing since February after having fallen for five months. The five-year Mumbai Interbank Forward Rate (MIFOR), a proxy for hedging, has risen by 50 basis points since February to 7.17% now. The implied yield on the benchmark one-year dollar/rupee forward premium has risen by around 20 bps.
Bankers say the cost of borrowing through a fully-hedged forex loan would be around 8-8.5% for a top-rated company. “When a company hedges, the advantage of borrowing dollars disappears,” said Sidharth Rath, president treasury and capital markets, Axis Bank. The cost of borrowing through domestic corporate bonds is around 8.80%. “For a mere 25-30 basis points benefit, I don’t think companies would go overseas,” said Manoj Rane, managing director and head of treasury at BNP Paribas.
Rath said that even for lower-rated companies, there is no cost advantage. A company rated AA could get dollars anywhere between 150 and 175 basis points above Libor (London Interbank Offered Rate). The borrowing cost works out to 8.5-9.0% once the cost of hedging is added. Such a company could borrow at 9.0-9.5% from domestic corporate bonds.
Even bank loans are becoming cheaper as many banks have pared spreads for loans, bankers said. With base rates likely to be pruned in 2015-16, the appeal of forex loans will dim even more.
Therefore, in cases where a natural hedge through dollar earnings is absent, companies would rather keep forex borrowings open.
Last year, the Reserve Bank of India had warned companies about large unhedged forex exposures citing a low hedge ratio of 15%. To push companies to hedge, RBI had mandated banks to keep aside additional capital on such unhedged exposures of companies.
“It is not worth not to hedge. But companies may have pass-through mechanisms for the forex cost,” said Rane. Rane believes that most of the loans raised abroad are by companies that have the best credit rating or have a natural hedge. Most others keep their forex exposures unhedged, he added.
RBI data show that during April-December 2014, companies borrowed $23.7 billion through forex loans, of which only $4.2 billion was used for rupee expenditure. Much of this $4.2 billion is said to be unhedged. The rupee has been moving in a narrow 61.75-62.50/$ for nearly six months now. However, the risk to forex borrowings cannot be ruled out as the currency did slip sharply to 63.62/$ in the last week of December 2014.