Indian Railway Finance Corporation (IRFC) has raised $500 million in overseas bonds as part of its fund raising activity, a move that signals a stable currency regime and will help the railway arm to meet extra budgetary resources (EBR) target, a critical part of the Indian Railways capex.
According to a source, the five-year bonds received bids for thrice the amount on offer at a rate of 2.23%. Dollar bonds are pegged to the US treasury yields which has come down from 3.23% in early November 2018 to around 2.44% by the end of March 2019.
IRFC will add a spread of 150 basis points and will fund railway projects at 3.73%. The source added that given that the rupee has strengthened in the past few months, IRFC has opted to not go for currency hedging. The Reserve Bank of India norms does not require upfront hedging for bond issue up to $500 million. “Hedging, which come at an additional cost of 2.5-5 percentage points, can be done later at an opportune time in case markets become volatile,” said the source.
The Indian rupee has strengthened 5% against the US dollar since November. Analysts believe that there is opportunity for Indian firms to tap overseas market given the rupee is stable and credit from the domestic banking channels have dried. “Global interest rates are softening and so it is a good time to raise overseas funds which are available at a lower cost compared with domestic funds,” said Kalpesh Mehta, partner, Deloitte India.
Mehta, however, cautioned that usually an un-hedged exposure is taken by firms whose balance sheets have a natural hedge, that is inflows are also in the same currency in which it avails loans.
IRFC is entrusted to raise EBR for the Indian Railways. EBR is usually raised from financial institutions. As per a March 2015 memorandum of understanding between the transporter and LIC, the insurer was to provide a financial assistance to the tune of `1.5 lakh crore to the latter’s identified projects between 2015 and 2019, and became a part of EBR. However, insurance regulator Irdai’s single-entity exposure cap for insures had come in the way of the railway’s plan to raise funds form LIC. While the IRFC was to raise `26,000 crore from LIC for FY19 as part of EBR, it could raise only `1,600 crore. The overseas bonds issue will help IRFC make up for a part of the shortfall due to non-committal LIC funds.
The overseas bond issue comes close on the heels of the Indian Railways set to raise $750 million from the Asian Development Bank (ADB) through IRFC. As reported by FE earlier, a deal with ADB will be signed soon, and the money will be used to fund the transporter’s plan to electrify 100% of its routes by 2021-22. The ADB fund does not carry currency risk as it will be provided in rupee-equivalent of $750 million. Recently, World Bank’s Multilateral Investment Guarantee Agency backtracked from a proposal to arrange a virtual soft loan of $500 million to IRFC, which was to come at an interest rate of 5%.