ECB lenders seek assets as mortgage

Auto parts, pharma & mining firms targeted

Indian companies seeking external commercial borrowings (ECBs)

are now required by overseas lenders to mortgage their assets.

Even those that contracted ECBs in 2006-07 and 2007-08 have

been told to restructure the debt.

Overseas lenders have taken this step in view of faltering

profits and drops in share prices of Indian companies.

Lenders have specially targeted companies in auto ancillary,

pharmaceutical and mining sectors, according to bankers.

They have also demanded a quick restructuring of ECBs

if the borrowing firm has gone in for business restructuring or merger.

In one case, a petrochemical company merged with another.

A project for which $1 billion in ECBs was raised became an

sset of the merged company. Because of the merger the secured

loan, raised in 2006, had to be first converted into an unsecured loan

and then to a corporate loan. Some lenders also pulled out of the loan following this.

“Banks were not comfortable as the loan turned unsecured,” explained

a Mumbai-based investment banker, requesting anonymity

as he represented a foreign lender.

According to another official in the corporate banking division

of a big foreign bank, quite a few companies have not been able

to meet their covenants (the agreement to maintain ratios like debt

to equity, debt to operating profit and net worth).

“Their lenders have asked them to attach immovable assets to

the unsecured loans.”

According to him, the potential of a default is higher where the

share price is dropping or profitability is under pressure.

To reduce the risk on their books, the lenders have forced

a loan restructure.

Since banks cannot accept shares of a company as a mortgage

due to regulatory issues, they have to go in for immovable assets

like machinery, land and property.

For Indian companies 2006-07 and 2007-08 were bountiful ECB years,

which saw foreign lenders eager to lend. In 2006-07, Indian firms raised $25 billion

in ECBs; in 2007-08 the tally was $31 billion. About 90 per cent of the ECBs

were unsecured loan, say bankers.

“If a loan is given for project finance and acquisitions, the project

or the acquired company is mortgaged as an asset; the balance

amount of the loan is unsecured,” says Joiel Akilan, chief representative

of Banco Bibao Vizcaya Argentaria, a foreign bank in India.

The ECB market has turned tough not only for existing

customers but also companies that now plan to raise debt overseas.

“Small and medium sized companies hitting the ECB market

for the first time or those that don’t have a credit history find

it difficult to raise money abroad,” says an investment banker at ICICI Securities.

Akilan says, “Short-term liquidity is not a problem, but when it comes to long- term loans,

bankers are wary and uncertain.” According to him, many foreign banks

are also re-strategising their lending to markets.