Bridge Loan RbiRbi bridging loan
Opponents of the ruling have argued that bank-guaranteed loans are crucial to the performance of local bonds and allow lower-rated firms easy entry to finance, especially in periods of limited cash. RBI said that banking should not issue guarantees on loans or indebtedness of any kind and that permitting such a policy could "have a significant impact on the system and hinder the emergence of a true commercial loan market".
However, the regulatory authority has not addressed the issue of the threats presented by such marketable instruments. Tata Motors made the move only eight working days after successfully using a fixed-rate loan issued by a Tata Motors company to fund a $3 billion 12-month bridge. 42 billion (USD 886 million) through a multi-tranche Rupees note linked to a loan improvement in the shape of a stand-by facility from the State Bank of India (SBI).
"RBI has no clue why this is such a big issue for the RBI because it does not hinder the growth of the debt markets but rather assists AA-rated companies and below to gain entry to the market," one bankier said. "My comprehension is beyond if a banking institution can assume the business risks through a loan, why it cannot guaranty and take the risks of a bond," the bankier added.
"Warranties and other structural measures to increase bonding ratings are global instruments and it is difficult to see how this would hinder the evolution of corporates' debt markets," another player said. "This framework of guaranties will bridge the gap between the loan and debt markets," said the player. Bank-backed corporates were customary in countries such as continental China, where such loan enhancement was mandatory.
The supervisory authorities are, however, imposing an about-face and now prohibiting such bonds from obtaining banking assistance. The Tata Motors group certainly profited from the SBI-guaranteed bonds. Much needed funds were collected just before the funding of its $2 billion bridge loan to finance the Jaguar/Land Rover takeover. While Citigroup and Tata Capital were the leading arrangers of the issue, SBI took common control.
Bonds were divided into four tranches: a 23-month 8 billion rupees issue at 6.75%; a 47-month 5 billion rupees issue at 8.75%. Comparatively, a rupiah loan would have been 12. It would have been almost unfeasible for the borrowers to issue a rupees without a guaranty, if not much more costly than a loan, and not as agile as the structure.
Tata Motors' latest issue is a 2% voucher plus a repayment bonus. In addition, there is a further 1% in relation to the SBLC warranty costs, and Tata Motors generated financing costs of around 10%.