While record issuances of offshore bonds from India were witnessed in 2014, they declined more than 50% year-on-year in 2015. Madhur Agarwal, head of debt capital markets at JPMorgan India, tells Bhavik Nair that with the likelihood of funding requirements picking up, 2016 should see an uptick in supply of paper, especially from the investment grade names. Excerpts:
The year 2015 that saw fall in offshore bond issuances by Indian firms and banks. What is your view for 2016?
Markets were volatile in 2015 due to concerns over China growth and the currency devaluation, fall in commodity prices, anticipation of Fed liftoff, EM currency concerns as also due to worries over the Greece crisis. But despite these concerns, India remained a sweet spot. Investor sentiment around India was positive and investors were looking for avenues of diversification away from India. However, leveraged balance sheets and overall investment climate suppressed private sector investments, resulting in reduced funding requirements for corporates. This also translated into slower credit growth for banks as a result of which offshore bond issuances by Indian entities saw a substantial drop.
Heading into 2016, most of the macro concerns which affected markets in 2015 remain as a result of which markets could see periods of volatility. However, from an India perspective, with bond spreads still at attractive lows for investment grade issuers, and with the likelihood of funding requirements increasing with the economy picking up steam, it is reasonable to expect an uptick in supply, especially from investment grade names. Some of the recent amendments to the ECB regulations and the introduction of offshore rupee bonds can be expected to further boost the offshore bond issuance volume out of India. Our internal credit research forecasts approximately $10.5 billion of US$ bond issuance volume from India in 2016 against approximately $8bn in 2015.
India is in a falling interest rate regime whereas the US is apparently looking at a rate hike. How will this narrowing of interest rate differential affect foreign bond issuances by Indian firms and banks? What effect will it have on pricing?
Banks generally swap fixed rate offshore currency bonds into floating rate and use bond proceeds for deployment out of their overseas branches. Hence, banks are unlikely to be too sensitive to underlying rate movements. Bond issuance volume by banks is likely to be, therefore, more driven by growth in credit demand. On the corporate side, issuers look at bond markets as a means of diversification, providing the ability to do a larger size at one go. Hence, corporates will continue to look at bond markets as a viable alternate source of funding. Many corporate still prefer dollar funding as they have a natural hedge on account of exports or overseas operations and do not need to swap into Indian rupee, and this should continue this year also.
What sectors are likely to see revival in terms of offshore bond issuances? Why?
Historically speaking, we haven’t seen any specific sector themes out of India when it comes to offshore bond issuances. Banks have been regular issuers and there are a number of Indian bank bond maturities this year, which should result in more transactions from this sector. Infrastructure companies have funding requirements and in the event of offshore rupee bond market picking up, we could see higher volume here as well.
Where does India stand among its Asian peers when it comes to issuances of offshore bonds? Where does India stand in terms of pricing?
In terms of issuance volume, India typically lags China and South Korea. China contributes nearly 50% of the overall issuance volume, with South Korea seeing anywhere between $15-20 billion of issuance volume on an annual basis compared to approximately $8 billion for India last year. Bond pricing is generally driven by rating. However, given the bullish sentiment on India and some of the concerns emanating out of China, many Indian names trade comparable or only slightly wider to Chinese names rated few notches higher.
It is believed that Japanese and Australian banks are giving tough competition by offering loans at very tight spreads because of their lower cost of funds. Is this having any impact on the overseas bond issuances? Is the loan market giving a tough competition?
Loan pricing for top-tier corporates was cheaper than what they would have been able to achieve in the bond markets for a major part of 2015. This did have some impact on the bond issuance volume. If one looks back over a longer period, there have been periods in which loan pricing has been cheaper and others in which bond pricing has been lower. These are cycles and they invariably reverse sooner or later. Bond markets still remain attractive for a wide variety of situations including longer tenor, covenant-lite structure, no amortisation and diversification of investor base.
What is your outlook on junk bond issuances out of India? In 2015, the market seemed to have expected good volumes but it did not see any major pick-up. What is your outlook for 2016 and if junk bond issuances are going to rise, why would it happen?
The ECB pricing cap has generally restricted high yield issuers from accessing the international bond markets. Exceptions have been the high quality names like the Tata group or utility credits like Delhi Airport. Other high yield issuers have generally used the proceeds overseas where the pricing cap doesn’t come into play but number of such prospective issuers is not very large. High yield (HY) issuance volume across the region took a substantial hit due to broader market volatility as well as due to instances of default from China. This resulted in the high yield markets generally not being accessible for a major part of 2015. While we saw 3 HY deals in the first quarter last year, there were no issuances for the next 3 quarters. In terms of volume, we do not expect a significant jump this year. There is no pricing cap on offshore INR bonds but this market is yet to be tested for high yield issuers.