Core fillip for loan syndications

A sharp upturn in business cycles in the steel and infrastructure sectors has spurred hectic activity in the big-ticket loan syndication market.

Tamil Nadu-based mining company Neyveli Lignite Corporation is planning to raise Rs 2,000 crore (Rs 20 billion) through a loan syndication shortly, and Bhushan Steel in Uttar Pradesh is tying up Rs 2,000 crore.

The list also includes Rastriya Ispat Nigam Ltd, the corporate entity behind Vizag Steel, which is tying up Rs 4,000-5,000 crore (Rs 40-50 billion) for capacity expansion, bankers said. The state-owned entity is, however, yet to get the government's nod for starting the syndication.

These companies have been planning to enter the market for quite some time now. However, they are finally ready to strike the deals as corporations feel that interest rates may go up from the current level.

The yield on the 10-year benchmark government paper, which hovered around 6.6 per cent last month, has shot up to 7.10 per cent.

"Corporates prefer loans over bonds in today's market since loans are cheaper. Typically a AAA corporate raising a 5-year loan will be able to do so at 7-7.5 per cent," said Anil Ladha, senior vice-president, ICICI Securities.

In the secondary market, the yield on a 5-year AAA rated paper is around 7.1 per cent, about 60 basis points higher than the yield on a government paper of comparable maturity.

Towards the end of March 2004, Hindalco raised a 10-year, Rs 5,000 crore (Rs 50 billion) syndicated loan at an attractive interest rate of 7.1 per cent with a reset clause, allowing rates to be adjusted every five years.

Most of these syndicated loans will be floating rate loans with a 2-3 year interest reset clause. Sethuamudram Ship Canal Project, the special purpose vehicle floated to construct a shipping canal linking Palk Bay and Gulf of Mannar, is planning to raise Rs 1,500 crore (Rs 15 billion).

Ports like the Jawaharlal Nehru Port Trust and the Kochi Port are also looking at raising funds with the former planning another container terminal. National Thermal Power Corporation is also in talks with bankers to carry out a loan syndication.

"A host of companies have capacity expansion plans lined up and we expect the capital expenditure trend to be robust this financial year," said a senior bank executive.

For instance, the State Bank of India, the largest commercial bank in the country, carried out 23 loan syndications in 2004-05, and expects to do over 30 syndications this year.

Smaller loan syndications in the offing include Small Industries Development Bank of India's plans to raise Rs 500 crore (Rs 5 billion), Maheshwari Vishwas' Rs 120 crore (Rs 1.2 billion), VKG Industries' Rs 120 crore, Jupiter Lifeline's Rs 40 crore (Rs 400 million) and Precoated Steel's Rs 100 crore (Rs 1 billion).