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Commentary

LIBOR is up to 6.45%

It seems the subprime issues have started to affect LIBOR quite a bit. From the Telegraph:

Morgan Stanley said that the recent jump in the benchmark London Interbank Offered Rate, which yesterday rose to just under 6.45pc, was not merely a seasonal blip but a major warning sign of pain ahead.

It came amid further jitters in the banking sector, where many smaller, more indebted banks are struggling to find lenders to keep them afloat.

Libor rates, which indicate how willing banks are to lend to each other, have risen sharply during the past week, after spending almost two months close to the 6.3pc level – a worrying sign since it was Libor’s increase in August that signalled the initial impact of the credit crunch.

Uhm, weren’t a lot of Indian ECBs linked to LIBOR? Last I heard, LIBOR was around 5% or so. If we consider that most Indian ECB Loans are linked to LIBOR and that most were made earlier this year or last, when the LIBOR was about 5.3%, then there is an interesting problem. From RBI, As of March 31, 2007, nearly 72,000 cr. was in ECBs, and between April and June, a further Rs. 34,000 cr. was added. This is a net of Rs. 106,000 cr., which we can consider at a dollar rate of 42 or so, meaning they $25.2 billion. LIBOR on this has gone up 1%, which is an additional interest of $250 million dollars a year, or Rs. 1000 crores. Of course one might imagine that the dollar has reduced in value – but remember that the reduction has already been accounted for as “foreign exchange gains”.

So who’s affected? I don’t know, but let me try and guess. Tata Steel for instance has a big loan for Corus, syndicated AFTER Jun 2007. This involves three tranches adding up to a total of 3.7 billion pounds. The effective rate is around LIBOR plus 200 points. For that loan, Tata Corus will end up paying an additional interest next year (if LIBOR stays this way) of about 1% higher – effectively around $80 million, or Rs. 300 cr. This is about 10% of Tata Steel’s Net Profits annualized. (Of course if the pound goes down against the rupee further some of the losses may be recovered, but I doubt it will impact it as much as 300 cr.)

Who else? ICICI Bank seems to have a ton of them, according to this article. It has raised about $12.5 billion in the last two years, and these loans are all linked to LIBOR it seems. If LIBOR goes up 1%, their net payment is up about $125 million which is about 500 cr. That’s again about 10% of profits.

Now I don’t have all the information about how the ECBs are structured but on the face of it the LIBOR rise will affect every single ECB given. Companies like Reliance Industries, Reliance Communications, L&T, Bharti Airtel etc. have also got a lot of ECBs – the only company that will not show a serious loss is Reliance Industries as they have not booked forex gains for the gains in the dollar so far.

Given that with the subprime crisis the LIBOR may stay at this rate or go higher, and the impact may be quite heavy to some Indian companies. But some questions I have are:

  • Am I being too simplistic? Is this a valid concern at all?
  • Is there something called a fixed rate loan? Or if the loans say LIBOR+something they reset every x months as LIBOR changes?
  • Do you know a list of Indian companies with their ECBs, amounts and rates?

Will be interesting to probe this further.

Disclosure: Short Nifty.

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