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JSW Steel is looking to increase the local currency component in its borrowing mix to meet a Rs150bn (US$1.88bn) capex target by the end of March as the offshore bond market remains challenging and expensive.

The Indian steelmaker also wants to improve its ESG performance and expects to obtain a US$200m seven-year sustainability-linked loan from two foreign banks within the next six months, according to Seshagiri Rao, joint managing director and group chief financial officer.

JSW Steel plans to raise half of its borrowing from the rupee market and half from foreign currency this calendar year compared to a 45%/55% split last year.

“This year the borrowing mix is tilting towards local currency,” said Rao. “The kind of opportunity to raise large funds at competitive rates in overseas markets this year may not be there as interest rates are rising globally.”

The bias towards local debt comes as average offshore borrowing costs for high-yield or Double B rated Indian issuers has increased by more than 500bp year to date, according to Fitch. JSW Steel is rated Ba1/BB (Moody's/Fitch).

“The offshore borrowing cost of 10% would be well above the local interest rate of 8%,” said Matt Jamieson, head of APAC research for the corporate ratings group at Fitch. “Economically, in terms of cost differential point of view, it makes sense for issuers to refinance and raise funds onshore.”

This year Indian borrowers have raised US$6.2bn from club and syndicated loans denominated in rupees compared with US$11.6bn in foreign currency loans, according to Refinitiv LPC data.

However, with interest rates on the rise – both onshore and offshore – the local currency loan market offers competitive funding with longer maturities.

“JSW is a bankable credit and typically raises foreign currency loans through club or bilateral deals with international banks and export credit agencies,” said one senior loan banker with a foreign bank in Singapore. “In the current market, it can raise a foreign currency unsecured loan with a seven-year maturity (average life of five to 5.5 years) with an all-in pricing of around 225bp over SOFR.”

By comparison, JSW can raise 10 to 12-year money in the rupee loan market at an all-in cost of around 8%–8.5% or slightly higher after taking into account the latest rate increase in the US that will likely have a ripple effect in India, the banker added.

JSW Steel received approval in May to raise Rs70bn in the domestic bond market. It last raised Rs10bn from 10-year bonds at 8.76% in May 2021 and is currently considering raising up to Rs10bn from three-year bonds, according to market sources.

Rising rates

Market participants expect the Reserve Bank of India to raise rates by 50bp at its September 30 meeting following the US Federal Reserve's 75bp increase on Wednesday. The RBI has raised rates by 140bp to 5.4% since April to tame inflation.

Following Wednesday's Fed decision, the rupee fell to a record low of 81.09 against the US dollar and is expected to weaken further with more rate increases from the Fed on the horizon in the coming months.

Against that backdrop, JSW Steel might be better off raising funds in rupees to avoid foreign currency risks, especially given that its capital expenditure requirements are in the local currency, said analysts.

The company last tapped a foreign currency loan in June 2021 when it raised US$150m in seven-year money, according to Refinitiv LPC data. Yes Bank provided US$100m as a mandated lead arranger, bookrunner and underwriter, while Canara Bank participated with US$50m.

JSW Steel has a capex plan of Rs480bn over the next three years. "We have tied up funds for our ongoing capex programme," said Rao. It is eyeing up to Rs100bn for a five million tonne expansion of its Vijayanagar plant in the southern Indian state of Karnataka. It is looking to raise Rs50bn through a syndicated rupee loan from domestic banks, Rs30bn in loans from export credit agencies and the remaining Rs20bn through foreign currency external commercial borrowings from foreign banks, said Rao. ESG agenda

Meanwhile, JSW Steel is setting up a large beneficiation plant in the eastern state of Orissa to improve the quality of raw materials and lower carbon emissions.

“We have earmarked Rs100bn to reduce carbon emissions as we are migrating from fossil fuel-based power to renewable power,” Rao said.

JSW Steel has a target of 1.95 tonnes of carbon emissions per tonne of steel by 2030, from 2.52 tonnes as of end-March 2021.

“We have signed an agreement with JSW Energy to set up 958 megawatts of renewable energy,” Rao said. “We are putting in 26% equity in JSW Energy’s special purpose vehicles from our internal cash accrual and balance equity of 74% will be contributed by JSW Energy,” via funds tied up with local banks. JSW Energy, a listed power producer, is a separate unit under the JSW Group.

While JSW Steel is seamlessly transitioning from bonds to loans to advance its ESG agenda, Rao said India needs more incentives and regulation to adopt renewable power.

“There needs to be proper standardisation and definition of green and sustainable financing to avoid greenwashing,” Rao said. “India needs to come up with its own green taxonomy – standardisation and definition of eligible sustainability-linked projects which will encourage supply of money.The US$200m SLL it is planning to raise follows a US$50m five-year SLL completed recently for JSW Cement’s expansion of cement capacity. In September last year, JSW Steel printed a US$500m 10-year sustainability-linked bond following JSW Hydro Energy’s US$707m green borrowing in May.

Indian borrowers have raised a total of US$1.63bn through ESG loans this year compared with US$5.05bn last year, according to LPC data.