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Friday, 19 April 2019

Pause for thought

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Tax changes and low rates lured more Indian issuers to the offshore bond markets earlier this year, before a global risk reversal put a stop to it. Investors are now waiting for stability before markets reopen fully.

Women hold umbrellas to protect themselves from a heavy rain shower as they stand at a bus stop in the western Indian city of Ahmedabad.

Source: Reuters/Amit Dave

Women hold umbrellas to protect themselves from a heavy rain shower as they stand at a bus stop in the western Indian city of Ahmedabad.

Offshore bond issues from India in 2013 are just US$1.45bn shy of last year’s record US$12bn, but the country’s well-documented macroeconomic challenges makes it far from certain that even that modest level will be reached.

Low borrowing rates, the result of massive monetary stimuli in the world’s developed economies, made the global bond markets a very attractive funding option for many emerging-market issuers in recent years.

Indian firms were no different, as evident from the increasing number of offshore bond sales from them – up from just five to six in 2004 and 2005 to 38 in 2012.

However, the prospect of a rollback of this monetary safety net has put EM investors on edge, resulting in a massive withdrawal of foreign investments and a rout of the Indian rupee.

The rupee is down 16.5% so far this year, making it the world’s weakest major currency. Credit spreads for Indian firms have widened hugely as a result. ONGC’s most recent bonds, for example, have widened as much as 395bp over Treasuries after pricing at 210bp over.

The rout has forced a number of Indian issuers to shelve their funding plans, with potentially big implications for capital expenditure. Of the many Indian issuers preparing to hit the market, Indian Oil Corp’s US$500m 10-year bond was the only paper to squeeze through in mid-July.

Syndicate Bank and Canara Bank had met investors in May. There was also talk that Indian Overseas Bank was looking to tap the offshore market.

As part of the exercise to bring in more dollars from onshore, the government has asked Indian Railway Finance Corp, Power Finance Corp and India Infrastructure Finance to raise US$4bn from overseas through quasi-sovereign bonds to finance long-term infrastructure development. IRFC will raise US$1bn before the end of March 2014, while Power Finance Corp and IIFCL will each raise US$1.5bn.

There is, however, little sign of any new issues materialising in the near term, as companies struggle to come to grips with paying far higher coupons.

“There has been a significant shift in pricing and it is going to take some time for issuers to adjust to the sticker shock. They are wondering if the rates will get better,” said David Greenbaum, head of debt origination, South Asia, at Deutsche Bank.

Non-dollar options

As a result of the higher cost of printing in US dollars, bankers are also pushing issuers to look at other currencies.

“I think other currencies, such as Singapore dollars, can selectively offer cheaper funding for the Indian corporations/financial institutions, but the liquidity might not be as much as in US dollars. So, the idea would be to tap the other currencies to maximise and diversify the funding sources, and also to achieve an optimal cost of funding,” said Amit Gulati, senior vice president and co-head (India) at DBS Bank.

Indian issuers have been well versed in tapping alternative currencies, such as Singapore dollars, Swiss francs, Hong Kong dollars and even Japanese yen, in the past, but pricing of any new deal will have to factor in swings in cross-currency swaps on account of the recent strength of the US dollar.

“I don’t think the picture is dramatically different for other currencies. They are always looking, but this is not a time where those conversations are gathering pace,” said a Singapore-based syndicate banker.

Loans lend support

In the immediate future, price-conscious Indian issuers are flocking to the loan market to take advantage of lower funding costs. The loan market is notoriously slow to react to price moves elsewhere making it an especially attractive alternative in times of stress.

Many of the new financings come from public sector groups, such as Bharat Petroleum Corp, Indian Oil Corp, ONGC Videsh, Oil India and Rural Electrification Corp, while private sector names, including Larsen & Toubro, Reliance Industries and Vedanta Resources, are in the loan market for overseas financing.

“Bond markets have been so active and the pendulum has swung so far in the direction of bonds that many banks actually started to feel starved for assets and are now happily going back to the lending market. So, at the moment, it appears that the loan market is offering a good opportunity for Indian borrowers,” said Greenbaum at Deutsche.

Loan market liquidity, however, has its limits, and some bankers expect issuers to come back slowly to the bond market in search of longer tenors and bigger deals, despite the higher cost.

“There are issuers waiting, but they are confused because the loan markets are still offering much better rates than bonds. Obviously, this may not last, but still a lot of people think they can tide things over for the next two to three months and, if things improve, they can go for bonds. Whether [or not] that will happen is a question mark,” said another Singapore-based DCM banker.

To see the digital version of this report, please click here.

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