ecb: Foreign lenders seek clarity on ECB borrowers’ rating

Several foreign lenders engaged in raising overseas loans and bonds for Indian companies have sought clarity from the central bank on whether the relaxed rules on higher offshore borrowing will apply only to globally higher rated firms. Such a criterion threatens to limit the number of potential beneficiaries, said people familiar with the matter.

Companies rated high domestically may not always make the investment-grade cut when rated by overseas agencies. Hence, bankers want to know whether the central bank’s reference to rating for eligibility to avail the latest plans applies to the domestic context or even overseas.

A top rated company globally can price bonds or loans with a spread in the range of 100-200 basis points depending on its brand, said dealers. However, a company rated high-yield by overseas rating agencies needs to offer much higher to draw global banks/investors. One basis point is 0.01 percentage point.

“The latest relaxation makes sense particularly for companies rated in the high-yield category by global rating companies,” one of the persons cited above told ET.

On Wednesday, the Reserve Bank of India (RBI) doubled a local company’s borrowing limit to $1.5 billion via the External Commercial Borrowing (ECB) mechanism under the automatic route.

Foreign Banks Seek Clarity on ECB Leeway

“The all-in cost ceiling under the ECB framework is also being raised by 100 basis points, subject to the borrower being of investment grade rating,” the RBI said last week.

This threshold is currently capped at 500 basis points. Eased rules will be in force only up to December 31.

Foreign banks have individually approached the RBI, which did not comment on the matter.

“For the same rating, the probability of default for any local rating grade is higher than global grades,” said K Ravichandran, chief rating officer,

Ratings. “This has ramifications for a local company raising money globally. The borrower will get an offshore rating much lower than its onshore grade as the former is also influenced by the sovereign rating of the country.”

A triple-A rated company by ICRA will likely be graded BBB- or Baa3 by Moody’s Investors Service, an international rating company.

Moody’s rates about 76 Indian borrowers of which only 31 companies fall under investment grade (IG).

In the international market, a local company’s rating is generally capped up to the rank of India’s sovereign rating, which is BBB-, the lowest rank in IG.

There are some exceptions. A local company can be rated a notch or two higher than the sovereign grade provided a majority of its earnings are in dollar terms. This applies to select sectors including information technology and oil and gas.

Barring triple-AAA rated companies in India, other rating ranks within the IG category generally do not find the same rank when they are rated by international rating companies. Entities rated between AA and A would find their ranks in the High Yield category while the rest will struggle to find even an acceptable rating for raising funds overseas.

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