At a time when higher US interest rates have made it more expensive for Indian companies to tap into foreign bond markets, mining major Vedanta Limited likely entered into a direct transaction with the Life Insurance Corporation of India to raise 4,809 crores of rupees via 10 years. obligations, several sources have confirmed Trade standard.
“The transaction is an LIC transaction, it is structured with LIC. They [Vedanta] are double AA [rated]. It is a 10 year old paper. It’s straight trade with no-coupon auctions, it’s open auctions,” a senior Treasury official said on condition of anonymity.
“The price is around 10 years G-sec plus 100 basis points – probably [to be] around 8.50%,” the source said. The benchmark 10-year government bond settled at 7.41% on Monday.
Several sources said that while the details of these structured transactions are not made public, the size of the deal indicated LIC’s involvement.
The mining giant is also planning to raise Rs 1,800-2,000 crore through the sale of 18-month papers, although the sources did not mention the investors involved in the fundraising.
Emails sent by Trade standard to Vedanta and LIC have not received responses as of press time.
According to sources, while the deal on the 10-year bond was reached, talks were still ongoing for the 18-month bond.
Vedanta plans to use the proceeds to prepay or pay down existing debt and for capital expenditures. The company last raised funds via local currency bonds in December 2021.
Earlier this calendar year, agencies such as Crisil and India Ratings upgraded Vedanta to AA.
Last week, Vedanta Resources’ dollar-denominated debt maturing in 2024 suffered its biggest drop as the rupee weakened to record lows. The national currency settled at an all-time low of 78.39 to the dollar on June 22. So far this calendar year, the rupee has lost about 5% against the greenback.
The weak rupiah amid higher US interest rates, high crude oil prices and record outflows of Indian stocks abroad has made it more expensive for companies to service their external debt.
As of February 2021, Vedanta had raised $1.2 billion via offshore bonds.
India’s head of ratings and research, Soumyajit Niyogi, said headwinds that had given Indian borrowers easy access to offshore markets and helped them tap into cheaper funds over the past two years, have now turned into headwinds.
“Rates in advanced economies have risen significantly, particularly at the shorter end of the curve, which is largely tied to floating rate borrowing in offshore markets. Rupee weakness has further aggravated the arithmetic,” Niyogi said.
Data compiled by research bureau Business Standard showed that from $6.7 billion raised in March 2022, offshore borrowing by Indian companies fell to just $50 million in June 2022.
It was in March 2022 that the US Federal Reserve began its current monetary tightening cycle, raising interest rates by 25 basis points. Since then, the Fed has raised rates an additional 125 basis points.
The cost of borrowing for Indian businesses has also increased in recent months as the Reserve Bank of India has tightened interest rates amid high inflation. The RBI has raised the repo rate by a total of 90 basis points since May. With rising interest rates on funds raised in financial markets, borrowers are increasingly resorting to bank loans. According to RBI data, bank credit growth was 13.1% in early June, the highest in three years.
The yield on the benchmark 10-year government security has climbed 96 basis points so far in 2022, with a 57 basis point hike to come between April and June. Government bond yields are the pricing benchmarks for corporate bonds.
According Bloomberg data, yields on AAA-rated 10-year corporate bonds rose from 7% at the March 31 close to 7.77% on June 24. Over the same period, yields on AA-rated 10-year corporate bonds rose from 7.79% to 8.48%.