Overseas bond issuances by Indian companies and banks hit $7.6 billion in the first six months of 2017. Over the last few weeks, spreads at issues — the difference between the bond yield and the benchmark yield during first-time issuance — have trended down. Neville Fernandes, head of debt capital market origination, Citi India, said these are record volumes surpassing those in CY2016 and CY2015. “With bond yields in most of the developed world still near historic lows, global investors are chasing higher yielding emerging-market debt including India,” Fernandes points out. Issuers in India are raising debt from global investors at a record pace because of rising investor demand and at some of the lowest rates in recent years. Bankers also attribute the surge in issuances to refinancing needs by a few entities and financing asset purchases by oil players.
Vijayan Subramani, managing director, treasury and markets, DBS Bank India, observed that there was a fair bit of refinancing to be done. “The oil companies have purchased assets which were financed through various means, such as bridge loans, accruals, etc. These payments have to be formalised and extended which is usually via the debt deals. As a result, you see that the number of issuances has risen,” Subramani said.
On Thursday, Rural Electrification Corporation (REC) priced its 10-year green dollar bond close to 170 basis points over the benchmark US Treasury yield. This is likely the lowest spread over a 10-year dollar bond this calendar year. Meanwhile, Samvardhana Motherson Automotive Systems Group BV priced its 7-year euro bonds at 140 basis points over the 7-year euro swaps with a coupon rate of 1.8%. This is a big drop compared to the company’s 7-year euro bond in 2014 when it had paid a coupon of 4.125%.
Subramani said the appetite for emerging market assets has increased and investors’ ability to take risks continues to improve. The supply-demand mismatch is another factor that has maintained the appeal for Indian papers. Foreign investors typically look to diversify their portfolios when volumes of debt paper from south-east Asian countries, especially China, tend to dominate their portfolio. As a result, any issue from India is immediately picked up.
“We believe the international bond markets will continue to see strong supply going forward, especially as more inaugural and high-yield issuers look to tap the G3 bond markets to diversify their source of funding and take advantage of low interest rates globally,” Fernandes of Citi India points out. If there is one segment that is likely to witness some friction, it would be masala bonds. Bloomberg data show four companies — NTPC, NHAI, HDFC and Shriram Transport Finance — raised funds via masala bonds this calendar year.
The Reserve Bank of India recently tightened the rules for issuing masala bonds. Under the latest norms, every issuance requires a nod from the central bank. Bankers believe that issuers are reluctant to pay the premium that comes with these instruments. “The masala bonds segment may not see any major pick up in coming times. Issuers are not ready to pay the premium which comes with the development of a new market in these masala bonds. If somebody wanted to take an exposure to Indian risk, there are better asset classes which provide the India risk with much better liquidity,” Subramani said.