Switzerland could soon lose its status as the preferred destination for Indian companies raising funds abroad.
The lack of interest by Swiss investors for Indian papers, as well as the rising swap cost, is discouraging Indian firms from raising money in Swiss francs (CHF), merchant bankers told Business Standard.
“For the time being, issuances are not happening in Swiss franc because of this whole overhang of potential downgrade in India’s rating. This is because many of these investors are now not allowed to invest in sub-investment grade papers. They will have to compulsorily sell the bonds if India’s rating downgrade happens,” said Sunil Agarwal, head of institutional client group at Deutsche Bank in India.
According to him, the swap cost for converting the Swiss franc into the dollar is not favourable. He says the swap cost is one of the factors responsible for the decline in Swiss bond issuances this calendar year.
When Indian issuers raise funds in a foreign currency, they usually prefer to convert it into the dollars because of its universal acceptance.
Bankers said of the 19 foreign bond issuances this year, only two were in Swiss francs. Even these two transactions happened before rating agencies such as Standard & Poor’s warned of a possible downgrade in India’s sovereign rating.
Indian corporates and financial institutions have been raising funds from Swiss investors since early 2011. Between January 2011 and March 2012, they have mopped up over $1 billion by selling bonds in Swiss francs.
“Since March 2012, no issuances have happened in Swiss franc. I believe the primary reason is the cost of conversion into dollars. The fear (among Swiss investors) of rating downgrade is a bit overplayed. I expect sentiments to improve in the coming months,” said a senior banker with a foreign bank on condition of anonymity because he was not authorised to speak to the media.
Some bankers and economists expressed optimism that India’s rating downgrade may not be imminent following the barrage of reform measures announced by the government.
“We believe the risk of a rating downgrade is now immensely reduced and the government could have bought itself time till at least the next Union budget,” Indranil Pan, chief economist at Kotak Mahindra Bank, wrote in his note to clients last week.
However, experts feel investors will not be keen to put their money into Indian papers until the uncertainty is lifted.