November 26, 2012 3:24 pm

India’s Lanco turns to China for funding

Indian power group Lanco Infratech plans to raise as much as $2bn from China for new projects, in a further sign that heavily indebted Indian companies are turning to Chinese financing to fund future expansion.

The New Delhi-based group said on Monday that it had struck a deal with China Development Bank, a state-backed entity, to raise $600m to finance the construction of two new power plants.

In exchange Lanco said it had made a commitment to buy Chinese power equipment for both projects, while CDB will help the group syndicate further loans from other Chinese banks to reach its $2bn target.

The deal is the second Chinese funding arrangement by a large Indian conglomerate this year, following a $1.2bn loan struck in February by billionaire Anil Ambani’s Reliance group from three Chinese state-backed banks, including CDB.

Indian companies have traditionally sought funding from domestic and western banks, but a combination of financial troubles in the west and India’s slowing economy have seen these funding options close for many businesses.

Sharad Jhingan, chief operating officer at Lanco, said: “In recent times we have seen sources of liquidity dry up, for power projects in particular.

“But we have also been sourcing most of the turbines and boilers we use in our power stations from China for a long period of time, so it was the next logical step to sign a deal for financing too.”

Lanco grew rapidly over the past five years to become one of India’s largest independent power producers, but has recently suffered from regulatory delays and fuel supply problems, and is struggling to service gross debts of Rs336bn ($6bn).

This burden makes Lanco one of India’s most heavily indebted companies, suggesting that the power producer might have sought cheaper Chinese financing in part due to difficulty to raise funds from other sources.

“No way is anyone else here going to lend this group [Lanco] any more money,” says one senior India banker, speaking on condition of anonymity. “They are way too leveraged.

The deal comes at a time when rising corporate debt has placed pressures on India’s banking system, while a number of leading companies, including Kingfisher Airlines and renewables group Suzlon, have failed to meet their debt obligations.

A recent analysis by Credit Suisse shows that 10 of India’s largest industrial groups, including Lanco and Reliance and the likes of Vedanta Resources and Essar, have seen gross debts rise more than fivefold to Rs5,395bn over the past five years.

However, Lanco said any money raised from the Chinese deal would be used only to buy equipment and not to refinance any existing loans.

Industry figures said the group’s decision was also part of a wider trend of Indian groups seeking equipment financing abroad, despite concerns among domestic manufacturers fearful of losing business to inexpensive Chinese competitors.

Rajiv Kumar, an economist and former director-general of the Federation of Indian Chambers of Commerce, a trade body, said: “Indian companies are looking to China not just because they lack liquidity but because Chinese equipment is so much cheaper than you can get in India.”

Lanco Infratech shares closed up more than 4 per cent, at Rs12.70. CDB could not be reached for comment.

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