Hedging Costs at Decade Low Lure India Firms Back to Dollar Debt


Indian borrowers stung by the pandemic have found financing costs in the dollar bond market too pricey recently. But that’s changing as their currency hedging costs decline.

Six-month Mifor swap rates, a combination of the London interbank offered rate and dollar-rupee forward premiums used by India’s borrowers to hedge exchange rate risks, are near a nine-year low. The cheaper hedging costs will give an additional impetus to companies, including Adani Ports & Special Economic Zone Ltd., Lalitpur Power Generation Co. and the nation’s biggest lender State Bank of India, seeking to issue dollar notes.

“The fall in offshore hedging costs boosts prospects for more Indian companies to issue dollar bonds at reasonable costs,” said Prabal Banerjee, group finance director at conglomerate Bajaj Group, the parent of Lalitpur Power.

Indian companies had issued a record amount of offshore notes in the first three months of 2020. But sales have plummeted since amid the coronavirus fallout and the world’s biggest lockdown. Borrowers may benefit from cheaper access to the dollar bond market, as they must repay a record $4.6 billion of foreign-currency notes next quarter.

The fall in hedging premiums cuts companies’ overall borrowing costs and could help some raise funds abroad at rates as much as 100 basis points cheaper than onshore.

The decline in hedging expenses stems in part from a recent rebound in the rupee, which has gained 1% in July. That makes it one of the best performing Asian currencies for the month and has helped it pare losses to 4.5% so far in 2020.

“The rupee’s recovery could see the pipeline for overseas issuance resume as it highlights an improving sentiment among global investors for Indian assets,” said Banerjee at Bajaj Group.

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