Jonathan Rogers, IFR Asia Senior Credit Analyst
So there was quite a bit of fuss last week when the IFC announced that it would be issuing up to US$1bn of offshore rupee bonds. A lot of the fuss centered on coming up with the appropriate name for such paper, which would be the first major offshore issue in the beleaguered currency.
Peacock and Tiger were mooted: perhaps not uniquely Indian enough. Ganga was up for grabs but might have had less than salubrious connotations. Samosa and Tandoori are favoured by many, but the final say will go to the Indian officials and IFC executives when the first deal is launched.
The question is not about finding the appropriate name so much as wondering how frequently it will come to be used. I recall the fuss about the so-called Panda bond market (maybe an easier item to name), or issuance from foreign entities onshore in China, when it was opened in 2005 by the IFC and the Asian Development Bank, which each issued on the same day.
Despite the initial fanfare and the thought that it would become a choice arena for offshore issuers, that market has never really taken off, and issuance has been sporadic, with the last print coming in 2012 from Japan’s Mizuho Bank.
Alright, the plan with IFC’s bond is to open up what it hopes will become a rich offshore funding source for Indian issuers and, although IFC is also looking to issue in the domestic rupee market, the main aim seems to be to help with the push to liberalise and internationalise the rupee. The hope must surely be that despite the best intentions, bureaucracy doesn’t get in the way.
China’s Panda bond market, however, is still a relevant lesson. There, issuance has been hampered by a cumbersome approvals process and has beenlong since overtaken by the offshore renminbi – or Dim Sum – market, where it’s easier for issuers to get approval and a hungry, global buyer base means implied funding costs are lower. An Indian answer to Dim Sum – Samosa bonds being the obvious name – promises much, but the Indian financial authorities are well known for binding such promising ventures in yards of red tape, and you’d have to wonder whether a Samosa market – or whatever name is eventually settled on – will ever prove to be a hassle-free venue.
Although the IFC has announced its intention to issue bonds, it seems the Indian financial authorities have not yet granted approval for any deal to go ahead. Whenever it does come, the hope is that any issuance will not simply end up as some illiquid vestige of good intentions that sits on the periphery of the main action.
THAT WOULD PROBABLY be a fair description of the issuance produced in global peso format by the Republic of the Philippines, which, despite being settled via Euroclear and in theory standing alongside issuance in offshore dollar format, is far more illiquid than issuance from the sovereign in dollars or in onshore pesos. The deals remind you somewhat of lost orphans that were once announced with great fanfare as the princelings that would institute a new order.
Perhaps the one difference in India’s case is the presence of its hard-driving central bank governor Raghuram Rajan, who was installed in the post just over a month ago and made his intentions clear of internationalising the rupee in his inaugural speech. That might have not come as too much of a surprise given the unit’s precipitous fall in the months prior to his inauguration, when the country’s officials were scrambling around to come up with short-term fixes to stem the bleeding.
But having seen the damage which speculators had inflicted on the rupee you would have to wonder how investors will view the IFC’s proposed offering, which will be settled in US dollars but pay coupons and redeem subject to the dollar/rupee exchange rate.
COMPARE THAT PROPOSITION to investing in Dim Sum bonds, where the exposure is to a low-volatility renminbi, a unit that has been steadily appreciating against the dollar. There was no near 25% depreciation to countenance, something which potential offshore rupee investors will have to input into their risk assessment when looking at putting money into the proposed paper. It makes you think that investors would probably favour Samosa bonds more if the country were to restrict the currency more rather than open it up.
The IFC’s sales schtick on the subject has been to play up India’s long-term economic prospects, and since the IFC has US$4.5bn invested in India – more than in any other country in its portfolio – you could say that the World Bank’s private sector arm is putting its moneywhere its mouth is.
We will find out in the coming weeks whether the market buys into the sales pitch. But in all this there is the question of when issuance from the Indian sovereign will emerge. It is perennially ruled out by the Indian authorities but one simply wonders why.
It’s all very well to offer investors a pure currency play on a Triple a credit like the IFC, but the real vote of confidence on the part of international investors will come when India comes to the market, either in dollars or rupees. If the Reserve Bank of India’s new governor really wants to lead from the front, that plan should be top of his agenda.
